Reserve Bank of India (RBI) Governor Shaktikanta Das. (PTI)
Reserve Bank of India (RBI) Governor Shaktikanta Das. (PTI)

In flight of dollar, Indian companies will need a helping hand from RBI

  • Market participants believe central bank should do more swaps and at concessional rates
  • As the dollar continues to climb, borrowings will continue to become dearer in the coming months

Everyone wants dollars because the safest currency when a virus is knocking at the door is the one that is used the most. The more than 1% fall in the rupee is perhaps the less nasty outcome of this.

What should worry the Reserve Bank of India (RBI) more is that dollar credit lines for Indian companies are getting jammed, as Neelkanth Mishra, India equity strategist at Credit Suisse Securities (India) Pvt. Ltd, said in an interview with BloombergQuint.

In the global credit markets, the cost of borrowing dollars has shot up for Indian firms. A close gauge of this is the Mumbai Interbank Forward Offer Rate (Mifor). The one-month rate was around 6.4% on Monday, a surge of 50 basis points in just 10 days.

The premium of buying dollars six months hence has surged as well. A basis point is one-hundredth of a percentage point.

Dollar's viral spiral
Dollar's viral spiral

Analysts warn that this surge in Mifor is not a one-time event, but could get prolonged given that the outbreak of Covid-19 is shutting down business activity across countries. As the dollar continues to climb, borrowings will continue to become dearer in the coming months.

“We expect liquidity to dry up in FX markets and quotes to become wider as participation tapers off. Operational and liquidity risk in such a situation would be at par with market risk," said foreign exchange advisory firm IFA Global in a note.

Considering the rising cost, companies will either postpone borrowings, as business activity is minimal given various countries are ordering lockdowns in the wake of the virus spread.

Some of this demand will come to the domestic market, which is also unfriendly right now, with banks being risk averse. “What is needed is perhaps dollar swap lines from the RBI or some sort of direct supply of dollars to companies," said Abheek Barua, chief economist and executive vice president at HDFC Bank Ltd.

To be sure, the central bank has already done a long-term sell/buy swap worth $2 billion with banks. The response to the swap auction on Monday was rather tepid and RBI ended up accepting just $650 million.

The premium of 196 paise that the central bank offered for buying back the dollar six months later was near the market level as against expectations of a concessional premium rate.

Market participants believe the central bank should do more swaps and at concessional rates.

Meanwhile, RBI has been battling the rupee’s depreciation through its good old market intervention so far this month. But there are limits to how much it can do, given the unprecedented $12 billion outflow from the equity and debt markets so far this month.

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