By Nimesh Vora
MUMBAI, Oct 14 (Reuters) - Indian importers continue to lock in future dollar purchase rates to protect against the rupee weakening, despite the banks charging more per month for such trades following the central bank's step to make them more expensive.
The Reserve Bank of India now requires banks to set aside cash equivalent to 20% of the notional value of the forward dollar contracts they sell. With banks passing the cost of complying on to clients, importers have to pay 11 to 14 paisa
per month more to lock in future dollar purchases.
However, forward dollar contracts remained attractive for importers. The rupee's recovery, after the Reserve Bank of India set out a series of measures to support the currency, helped offset these charges, bankers told Reuters. They requested anonymity since they were not authorised to speak to the media.
The currency has strengthened to a high of 94.72 rupees per dollar on Wednesday from levels near 96.70 last week.
SHORTER TENOR HEDGES
The charges vary, depending on the cost of funds, a treasury official at a private-sector lender said, with the cost rising with the length of the contract — meaning, additional costs for near-term contracts are lower than for longer-term ones.
As a result, hedging activity is now concentrated in shorter-term forward contracts of up to three months, bankers said.
"For importers this is a good opportunity to buy dollars and hedge. The approach should be to hedge as short-term as possible, and to use low-cost options," said Samir Lodha, managing director at Mumbai-based QuantArt Market Solutions.
The benefit of option structures can negate part of the extra cost of hedging arising from RBI's new measures, he added.
The continued appetite for forward dollar contracts among importers complicates the RBI's efforts to curb dollar demand and support the rupee.
The central bank's interventions spur rupee rallies, which offer importers an opportunity to lock in more favourable exchange rates and draw them back into the forward market, which in turn could renew the dollar demand that the RBI is seeking to curb.
(Reporting by Nimesh Vora; Editing by Janane Venkatraman)
