The Central Bank (CB) may have by a quirk of fate contributed to a flourishing unofficial market operation in the wake of the US dollar exchange crisis eating away the remaining foreign reserves in the country. With foreign exchange resources being scarce, the CB is unable to pump dollars into the market and stabilise the [...]

Business Times

CB unwittingly contributing to unofficial market for dollars

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The Central Bank (CB) may have by a quirk of fate contributed to a flourishing unofficial market operation in the wake of the US dollar exchange crisis eating away the remaining foreign reserves in the country.

With foreign exchange resources being scarce, the CB is unable to pump dollars into the market and stabilise the rupee vis-à-vis the dollar rate.

The Business Times learns from highly placed sources that certain high-flying exporters have been opening Letters of Credit (LCs) on behalf of importers who require raw material for their respective industries but cannot do so due to CB restrictions on foreign exchange outflows. This has been going on for weeks and business for these exporters is, to say the least flourishing, according to these sources.

For example, a spice exporter shipping cinnamon or cardamon opens an LC for plastic materials on behalf of a friend in the construction business, saying it’s for the exporter’s raw material needs. This friend cannot bring in these items due to prevailing government restrictions. This friend will settle the spice exporter his dues at an exchange rate of Rs. 222 – Rs. 225. Both parties are happy, and it is a win-win situation. Needless to say, it is also a bizarre one.

The private banks don’t have the right and more importantly don’t have the capacity to examine these LCs. Especially when the regulator indicated that they were to manage their foreign currency funding without drawing down on CB reserves, these banks also probably unknowingly leaped into the breach and also found a way to make good money in the process.

The CB amongst the many nooses it has tightened over the past couple of months, resorted to prohibiting certain companies to obtain foreign exchange from their associate or subsidiary firms. For instance, if company A wants to import something and company B in the same group has enough foreign reserves to do so, company A is still prohibited to draw down on its subsidiary’s reserves by the CB. This is another reason that companies are resorting to other more practical avenues, jumping the barriers and wriggling their way through loopholes to run their businesses, analysts point out.

While imposing a ceiling on rupee conversions of exporters’ Business Foreign Currency Accounts’ balances the regulator has said exporters can’t cross beyond certain rates when converting dollars to rupees on these accounts. The CB also resorted to placing a ceiling on rates of dollar deposits held by exporters last week to reduce the gap between the rates offered between their deposits denominated in rupees and dollars, and rupee loans.

The exporters aren’t converting their dollars into rupees as the dollar deposits earn a higher interest rate and at the same time, the low lending rates have pushed them to borrow in rupees and fund their businesses while further eroding the reserves.

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