Rupee woes mount as India central bank bans import-finance tool

The Indian rupee falls 0.2 against the US dollar on a day other Asian currencies rally amid political turmoil in Washington. — Reuters pic
The Indian rupee falls 0.2 against the US dollar on a day other Asian currencies rally amid political turmoil in Washington. — Reuters pic

MUMBAI, March 14 — Traders can add one more reason to sell the Indian rupee. Stung by a US$2 billion (RM7.8 billion) bank fraud, the Reserve Bank of India banned a key import finance tool, a move that may push up short-term US dollar demand.

The central bank barred lenders from issuing guarantees in the form of letters of undertaking to overseas banks yesterday as it clamped down on the import-financing avenue used by two jewellers to perpetrate the nation’s biggest bank scam.

“The dollar requirement of importers has to play out and this may put some pressure on the rupee,” said Ashish Vaidya, head of trading at DBS Bank Ltd in Mumbai. “It will also translate into more rupee borrowings by these companies.”

The rupee fell 0.2 per cent to 65 to a US dollar on a day other Asian currencies rallied amid the political turmoil in Washington. The premia on buying one-year forward US dollars dropped for a third day as traders unwound positions to meet their immediate needs. The rupee has been buffeted this year by the nation’s worsening trade deficit and the bank scandal that’s dented foreign investor confidence.

Before yesterday, banks were allowed to issue such guarantees to overseas suppliers and banks up to US$20 million per transaction for a maximum of one year for imports of non-capital goods, and up to three years for purchases of capital goods.

The restriction “will prevent importers from rolling over dollar-payment liabilities,” said Abhishek Goenka, chief executive at India Forex Advisors Pvt. “It will lead to a near-term rush for dollars as well as push up the near-term dollar premium.” — Bloomberg

Related Articles

Up Next

Loading...