Indian central bank’s ballooning NDF position suggests more rupee losses: bankers
The non-deliverable forward is the Reserve Bank of India’s preferred market to keep the rupee’s volatility at a desired level
THE surge in the Indian central bank’s position in the non-deliverable forward market (NDF) reflects the extent of pressure on the rupee and suggests that the currency – already at a lifetime low – will fall further, bankers said on Monday (Dec 2).
The aggregate short foreign currency in forwards and futures position of the Reserve Bank of India (RBI) jumped to US$49.2 billion from September to October, official data showed.
This likely climbed to US$65 billion to US$70 billion till November, bankers estimated, with a large chunk of the total reflecting the RBI’s short position in the US dollar-rupee NDF market.
The surge comes amid the RBI having to support the rupee after the rise in volatility since the US presidential election and India’s faltering economic growth that has prompted foreign investors to pour out of the equity market.
Dhiraj Nim, a forex strategist and economist at ANZ, said: “The huge jump in the NDF book shows how much they (the RBI) have to do to manage the rupee’s exchange rate. It testifies the kind of outflow pressures that the rupee is having to contend with.”
The NDF has become the central bank’s preferred market to keep the currency’s volatility at the desired level. The RBI did not immediately respond to an e-mail seeking comment.
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In an NDF contract, as the name suggests, there is no actual delivery of currencies, which means that the central bank’s intervention via this route does not impact India’s forex reserves, but affects its balance sheet based on the profit or loss when the contract matures.
A senior treasury official at a large private sector bank noted that the jump in the RBI’s NDF position means “that the incremental support” it can provide to the rupee “is less”.
While, technically, the RBI can build an unlimited position, what needs to be considered is how that stacks up against the overall market’s position, said the official, who declined to be named as he is not authorised to speak to the media.
If the current challenging conditions persist, the rupee will fall at a “quicker pace than what we are used to” amid wider intraday ranges and higher volatility, he added.
The rupee slipped to an all-time low of 84.6825 per US dollar on Monday, prompting the RBI to step in yet again.
Nim added that the Indian central bank is getting into a “slightly tricky spot” considering that it has already stretched itself on the NDF.
“You can’t defend a currency too much when there are multiple headwinds. The rupee will most likely move further lower from here.” REUTERS
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