8 September 2021 12:57 am Views - 277
The Central Bank has written to banks asking them not to quote outside Rs.200/Rs.203 level for US dollars on all foreign exchange transactions as banks were quoting Rs.238 for a dollar by Monday amid exporters continuing to withhold selling dollars in the domestic market to book massive conversion profits hoping that the rupee would further shed value.
In a bank-wide e-mail sent out at the close of office on Monday, which tantamount to moral suasion, the Central Bank had asked banks to offer not more than Rs.200 when buying dollars and not higher than Rs.203 when selling dollars. In effect, importers who until Monday evening paid up to Rs.238 for a dollar can now buy dollars at a rate no more than Rs.203 while the exporters will get up to Rs.200 when they sell.
However, banks could offer rates outside this band when buying dollars, as they need foreign currency to meet importer dollar demand.
Dollars in the interbank market has also almost dried up, dealers said.
The Central Bank has also stopped issuing dollars from its reserves to maintain the peg as it asked banks to manage their outflows with inflows.
While banks complied with the official communication as they started offering dollars within the stipulated band yesterday, some feared the move could backfire by further tightening dollar liquidity as exporters could further stay away from converting their dollar earnings into rupees.
The latest official communication from the Central Bank came after about a week since the country took receipt of US$ 1.2 billion worth foreign currency from a combination of sources. Evidently, the authorities appear to be baffled by the rupee, which continued to depreciate despite these inflows.
“I am so surprised that the rupee has depreciated after so many weeks of all these new inflows that have taken place to the Central Bank. It seems strange. It should not have happened,” said Ajith Nivard Cabraal, the State Minister of Finance, Capital Markets and State Enterprise Reforms last week.
Some exporters expect the rupee to fall to around 250 against the dollar before converting their dollar earnings as they wait to make a windfall out of the conversion gains they can book, leading to massive rupee profits.
Instead of converting their dollar earnings, they borrow in rupees to fund their operational and investment expenditure making the most of the low interest rates in the domestic market, creating an imbalance in the supply and demand of foreign exchange.
In a bid to address this anomaly, the Central Bank on August 19 raised its benchmark interest rates and the banks’ statutory reserve ratio by 200 basis points so that their rupee loans get pricier than before due to tightening of rupee liquidity.
Meanwhile, the dollar deposit rate was capped at 5.0 percent so that any interest benefit exporters enjoy by holding on to dollar deposits will be negated and outweighed by the rise in rupee deposit rates in response to the policy rate hike.