Indian Rupee Rate (INR) Indian Rupee Forecast
Morning Briefing

Structure of the Indian Rupee Market

The Spot Market

A one word description for the Indian Rupee market is THIN. See Sodhani Committee Report : Constraints on the Market.

While no statistics whatsoever exist on the size of the market, traders generally estimate the average daily volume in the Spot market to be in the region of $ 500 million, given the facts that the Indian Rupee - Dollar Spot market is usually driven by commercial demand and supply and India's total trade volume (Imports plus Exports) was just about $ 68 billion in the fiscal year ending March '96 (and is expected to increase to about $ 75 billion in 1996-97).

There are very few large players in the market. The interbank market is dominated by the largest of them all, the State Bank of India (referred to as "Daddy"), traditionally the banker to the giant government owned enterprises in the oil, defence, steel and fertilisers sectors. Most of the Rupee - Dollar trades take place in Mumbai, where most of the other large banks operate.

Daily movements in the Spot Rates are determined mainly by trade related corporate demand and supply - the result is a very narrow base for the banking sector itself to undertake interbank dealing upon, and there is very little movement in the rates on a normal day. A range of 5 paise (one-hundredth of a Rupee) or 500 pips, can be considered average, a movement of about 0.15%. Volatile days can see movements of 15-20 paise, roughly 0.5%. However, as the number of market participants increases and as the focus of market activity shifts from the Forward market to the Spot market over the next 2-3 years, daily volatility can be expected to increase.

Most the Indian companies prefer not to hedge their capital related transactions - foreign exchange risk management is still an esoteric field in India and in any case corporates are constrained by a dearth of hedging instruments coupled with a generally unresponsive banking sector. As such, large Capital Account transactions tend to introduce large scale volatility in the market, as has been witnessed in the past.

Over 1993-94, India saw relatively large inflows on account of portfolio investments, which were regularly picked up the Reserve Bank of India, India's central bank, keeping the Rupee steady at 31.37, else the currency could have appreciated in nominal terms. Over September 1995 to February 1996, the Government's net foreign debt and interest repayments worth about $ 4 billion hit the market which, coupled with increased covering of capital liabilities by corporates and a dramatic slowdown in foreign portfolio investments, led to a 21.5% fall in the Rupee, from 31.60 to 38.35.

Trade, which had grew at a rate in excess of 20% over 1994-96, stagnated in Financial Year 1996-97(April to March), due to both a credit squeeze induced slowdown in domestic growth as well as a downturn in India's major export markets. Capital inflows during 1996-97 roughly matched capital outflows and, together with subdued imports and trade, led to a relatively stable Rupee.

After falling in 1995-96, FII and FDI flows picked up in 1996-97, making up for sizeable debt repayments.
Trade stagnated in 1996-97 due to a credit squeeze and slowdown in India's export markets

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