Forward premium on dollar declines

MUMBAI, Aug 5: The new export package announced by the government has had an immediate impact on the foreign exchange market. While the s...

MUMBAI, Aug 5: The new export package announced by the government has had an immediate impact on the foreign exchange market. While the spot rupee gained by nearly five paise to 42.45, the six-month annualised forward premium on dollar dipped below the crucial 7 per cent mark on Wednesday for the first time in three months following the two per cent reduction in interest rate on pre- and post-shipment credits and extension of tax holiday from five to 10 years for export-oriented and export-processing zone units.

The last time the forward premium dipped below the 7 per cent mark was on May 8 when the six-month forward premium annualised closed at 6.68 per cent. The six-month forward premium on Wednesday closed at 6.75 per cent after opening at 7.5 per cent.

8220;The forward rupee will strengthen,8221; a dealer said. The one-month forward closed at 3.65 per cent 4.50 per cent, three-month closed at 5.5 per cent 6.1 per cent and the one-year forwards closed at 8.17 per cent, down from 8.50 per cent onTuesday.

On the other hand, the spot rupee appreciated to cross the 42.50 mark to close the day at 42.45/46. On Tuesday, the spot rupee had closed at 42.50/52. quot;There was hardly any demand from importers as they are expecting the rupee to appreciate,quot; a dealer in a private bank said.

8220;There was dollar receiving at the beginning of the day as the State Bank and other large public sector banks began selling dollars in the forwards. Only a few foreign banks were paying,quot; a dealer said. While announcing the package, the Commerce Minister had said that the interest rate reduction from 11 per cent to nine per cent on pre- and post-shipment credit was a temporary facility and would be available till the end of the current financial year.

According to the commerce minister, the reduction was effected as exporters had cited high cost of export credit as a major reason for the difficult export performance which registered a negative eight per cent growth in the first quarter April-June of the currentfiscal.

Earlier, the Reserve Bank had tried to provide concessional credit of 6.5 per cent to exporters to be calculated with the base year as 1997-98 but could not take off as banks faced operational problems in implementing the scheme.

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The new package of measures designed to promote exports may or may not have the desired effect. But forex dealers are of the opinion that sentiment in favour of the rupee will certainly improve immediately as a result of the announcement. Expectations of inflows from Resurgent India Bonds have strengthened the rupee in recent weeks, and once the inflows start coming in forwards may dip even further, at least in the short run.