Indian banking system leaves $10 billion FX position unhedged – Possible effect on rupee could be months of depreciation

A $10 billion position has been left unhedged within the FX deposit redemptions section of India’s banking system which analysts are considering to be the potential cause of a possible depreciation in value of the country’s sovereign currency, the rupee, over the next few months.

Whilst some analysts are bearish, some actually do not consider this to be a potential liability, as such a drop would act as a booster for exports and possibly narrow the trade deficit although imports of oil and other commodities would become costlier, said experts, some of whom suggested the gap may have deliberately been left uncovered.

Three years after the Reserve Bank of India sought to shore up the rupee through foreign currency non resident-bank (FCNR-B) deposits, the country is bracing for an outflow as these are redeemed.

At close of business on Friday of last week, th rupee was at 66.72 a dollar on Friday, and of great interest will be the potential effect on Indian rupee futures contracts traded on the Dubai Gold and Commodities Exchange (DGCX) which is the world’s largest executing venue for the Indian rupee on an exchange-traded futures basis, accounting for 35% of all global Indian rupee FX order flow.

Dealers in India have stated that the rupee at 66.68 to the US dollar one week ago, and could drop in value to between 67.50 and 68.00 to the US dollar by December.

According to a note prepared by one of India’s top private sector banks, there’s a $9.5-billion gap between $22.4 billion of FCNR-B maturities and $12.9 billion of forward contracts for October and November.

“There is high possibility of a systemic rupee depreciation in the coming months on account of FCNR-B outflows,” said KN Dey, executive director at Mecklai Financial. “The rupee has been steady for almost 10 months and a fall will boost exports and in turn, reduce trade deficit.”