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Poornima Mohandas

MUMBAI, May 23

LARGE corporates, essentially exporters, betting on the appreciating rupee, are over-booking forward dollar contracts over and above their genuine foreign exchange exposure to cancel them later, raking in the moolah in the process. Over-booking of forwards too has contributed to the free fall in the forward premia witnessed in the recent months, though this is not the primary reason, say bankers.

"Large `AAA' and `AA' corporates who have risk-taking ability are `speculating' on the $-Re exchange rate by over-booking forward dollar contracts," said the treasury head of a private sector bank.

"This amounts to speculation in currency movements which is not permissible in the RBI's view since this could lead to undue volatility in the exchange rate," said a senior bank official. "However, the RBI seems to be aware of the present situation and is not likely to step in."

However, there are traders of the view that this kind of activity is necessary and completely permissible to develop the market. The belief is that the RBI is not likely to intervene, since they have let the market forces rule.

The central bank takes great succour from the burgeoning forex reserves of the country, which will come to aid in case of violent volatility in the currency markets.

By over-selling of contracts both the corporate and the bank — through which the corporate deals in foreign exchange — stands to gain. The exporter gains money by favourable exchange rate movement and the bank does increased business in terms of volumes.

"This is sort of activity is possible because the exporter does not have to furnish full details about his receivables on booking the forward contract. Only when he decides to cancel a forward, do bankers realise that he had initially over-sold. Otherwise, it is very difficult for bankers to detect this practice,'' explained the treasury head of a bank.

This is how the process of over-booking works. Supposing an exporter has export receivables worth $10 million coming in by end-August, seeing the rupee gaining, he — through a bank — decides to oversell a three-month forward contract due in August for a higher amount, say $15 million.

Towards expiry of the contract, the exporter decides to cancel the extra $5 million dollar forward contract, which is now due to the bank. He then buys

$5 million from the spot market at the prevailing $-Re rate. Provided the rupee appreciates, the exporter makes as profit the difference between the forward rate and the prevailing spot rate per million. By end-August when the forward contract expires, the exporter receives the equivalent of $15 million in rupees at the forward rate at which the contract was booked from the bank.

For the aforesaid transaction — if carried out at today's rates — the exporter could easily make about Rs 24 lakh provided the rupee appreciates to say 46.50 by August. This is a whopping 24 per cent of the size of his exports.

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