MUMBAI: The rupee is on a slippery slope this year, and costlier crude oil and offshore currency markets aren’t helping the sliding unit find a stable niche.”Dollar demand, driven by oil imports and offshore hedges, has resulted in a sharp fall in the rupee’s value,” said Ashish Vaidya, head of markets for India at Singapore’s DBS Bank. “Unless the authorities respond with stronger measures, India would not be able to distinguish itself from the rest EM currencies.”The offshore currency market is controlled by hedge funds. Depending on the risk they run on their investments in India, they hedge on the overseas derivative market, known as non-deliverable forwards (NDF) in market parlance.NDF contracts are cash-settled in dollars.This means that if a trader were to buy dollars when the rupee is at 72, and the local unit goes to 74, the buyer will book the dollar profits in cash.”Higher offshore dollar demand triggers arbitrage opportunities,” said Abhishek Goenka, CEO at IFA Globals, a Mumbai-based forex advisory firm. “In the past few weeks, there were arbitrage plays whenever the gap between offshore and onshore forwards widened. This is also weighing on the rupee back home, with the local unit touching record lows.”The gap or differential between domestic and offshore forwards has expanded to 11-23 paise across one-two-three month contracts.“Overseas investors without FPI status are seen rushing for covers through the offshore market,” said Anindya Banerjee, currency analyst at Kotak Securities. “While such dollar demand is reflecting next day in the domestic spot market, it has aided speculative activities, triggered by arbitrage opportunities.”For arbitrage trades, speculators are selling dollars on the offshore NDF market, and the pay-off is happening through dollar purchases in domestic forwards. NDF is an overseas derivative market working 24×7. There are some common participants in both markets.The rupee weakened in the offshore markets after the government announced measures to restrain its fall last Friday. Although the measures helped allay investor concern on the depreciating rupee, they did not reflect in the exchange rate Monday.In past few weeks, the rupee has been hitting record low levels, with 72.92 being the latest lifetime low.”The currency market did not react to the government measures as overseas developments like renewed tariff wars have overshadowed those five-pronged steps,” said Banerjee.The rupee fell nearly 1% on Monday belying expectations of a rally as investors believe that the government measures were short of expectations.The local unit closed at 72.51 a dollar versus 71.86 last Friday.Overnight weakness is weighing on the rate next day morning in the domestic spot market. The Indian central bank cannot control the NDF, said a trader from a large bank.The notional spot rate in the offshore market was weaker, at 72.55, late Monday India time.
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