Efforts to Keep the Rupee Weak


Efforts to Keep the Rupee Weak


A few years ago while investigating the circulation of fake Indian currency notes (FICNs), the Central Bureau of Investigations (CBI), India’s federal crimes investigation agency, discovered that the secret templates used to print currency notes were compromised-the counterfeiters knew exactly about the kind of special ink, paper and other ingredients which go into the making of currency notes. This is one way to erode faith in a currency. The other is an indirect intervention to ensure that it becomes worth-less.

What are some of the impacts

Sanjiv Malhotra – an Indian exporter, had to cancel his trip last month. Most of his orders are on hold. Compared to 16 crore last year, his Company hasn’t been able to clock more than Rs 6 crore worth of business this year. Public sector banks are not entertaining the LCs. All this because of the worst ever currency crisis in more than two decades, he says. Anshul Rastogi hoped to join a US university. His dreams are shattered. His family cannot afford to pay the fees of the foreign universities in dollars. The 17 year-old may now do a BA India and go for post-graduation abroad, if and when the rupee improves.

Indians were among the most frequent globetrotters for a variety of reasons from business, honeymoons, studies, pilgrimages or sightseeing to Singapore, Malaysia, Thailand, Australia, Europe, Far-East or Dubai every year. Indians were to account for 50 million outbound tourists by 2020 and had earned the reputation of being the highest spenders. All this will have to wait. Three-day wedding of British billionaire Pramod Agarwal’s daughter in Venice cost $27 million in 2011. Since then a number of wedding planners had cropped up offering to organize big ticket Indian weddings in exotic locations like Bali or Cayman Islands with 400- 450 guests in tow. Most such weddings are as good as a thing of the past. Daily average turnover of trading in currency futures and options on the National Stock Exchange declined 60 per cent from Rs 39,000 crore in June to Rs 15,303 crore in August.

What are the effects?

Erosion of wealth, diminishing purchasing power and shattered investor confidence – all the symptoms of depreciating currency are becoming visible. The market is in a super-panic stage. The unstable Indian rupee has created an artificial demand for USD. Investors are withdrawing money from India and parking it elsewhere. The only income for some exporters is from selling dollars in the market. Fluctuations of the Indian rupee are a serious risk to be managed as everything from the value of investments to cash flows is directly linked to the value of the rupee.

Non-resident Indians (NRIs) in particular are losing confidence in the Indian rupee. Some of them have started converting their wealth to dollars or gold to preserve their purchasing power and move to Singapore and other countries. Some wealthy Indians are trying to smuggle diamonds out of India because these are among the most preferred modes of exchange. To control the situation the Indian government has imposed severe controls to restrict foreign accounts and curbed gold imports, but nothing seems to be working. As per the new government policy, instead of the earlier limit of $200,000 an individual going abroad can officially just take a maximum of $75,000 out of India, while business houses can draw funds equivalent to 100 percent of their net worth, instead of the earlier limit of 400 percent. All this is what is making it tougher to travel abroad or pay overseas university fees.


All the above are causes and effects of an undeclared, unofficial, and unending currency war going on — overseas. A global syndicate or cartel of compulsive gamblers, betting enthusiasts, forex traders, Swiss banks and European financial institutions is suspected to be rigging the prices of the Indian, Taiwanese, Philippine, and Korean currencies in Singapore, Hong Kong, Dubai, London, New York and Tokyo. Their sole aim is to keep currencies fragile and the host countries and their economies at their mercy.

In all some 20 international banks and financial institutions—are suspected to be involved in manipulations and rate rigging worldwide. In addition groups of traders across the world in USA, UK, Switzerland, Europe and Asia might be using various online forums; instant messaging platforms like WhatsApp and BlackBerry Messenger to manipulate foreign exchange rates. Nearly half of the $50 billion a day rupee trades outside India happens in London, Singapore, Dubai, Switzerland, Hong Kong, USA and UK. UK accounts for 40.9 per cent in the global forex markets, followed by the US at 18.9 per cent, Singapore at 5.7 per cent, Japan at 5.6 per cent, Hong Kong at 4.1 per cent and Switzerland at 3.2 per cent. Manipulation, in economic terms, means causing otherwise stable prices to vary and profit from it.

Already different international agencies like the Swiss Financial Market Supervisory Authority FINMA and Financial Conduct Authority (FCA) UK have begun a worldwide probe into different aspects of the forex trade in rupees outside India. Besides banks – speculators take positions in the market to raise or lower the exchange rate. The outcome is that the badly battered Indian rupee is amongst the worst affected Asian emerging-currencies of 2013. Way down the ladder — fighting a grim battle for survival – its sixteenth among the most traded currencies in the world.

The needle of suspicion for alleged forex market manipulations is pointing towards a number of foreign banks like- ABN Amro, ANZ Investment bank, Barclays, BNP, Citibank, HSBC, Deutsche Bank, UBS AG, J P Morgan Chase, and Standard Chartered Bank. Just four banks account for over half of all trading in the foreign-exchange market, Deutsche Bank is No. 1, followed by Citigroup (15 percent), Barclays Plc (10 percent) and UBS (10 percent).

Only banks having their registered office outside India are allowed to participate in the NDF market. Big Indian corporates are also hoodwinking the law by placing orders through foreign banks. Foreign investors who are currently not allowed to hedge their rupee exposure in the Indian over-the-counter (OTC) or exchange-traded markets are also going through category-I banks. Apart from them arbitrageurs, hedge funds, global investment funds are using this as an opportunity to make money from volatility in the market.

Compared to just a few hundred million dollars in 2006, the average daily offshore market of $5 billion a day is a big problem for Indian regulators who have no powers to intervene or regulate the unrestrained offshore trade. More than half of the rupee trade takes place outside India where RBI and Sebi have no jurisdiction.

The modus operandi of this cross-country currency trade is simple – a bank uses the money deposited by a customer in its branch in one country to buy cheap dollars and sell them in another country to gain from the difference. It is like buying dollars in India and selling them in Dubai to book the profit differential without any risk. Though the RBI explicitly prohibits domestic banks and companies from this, the rules are easy to break. Even an Indian company with overseas operations can legally take rupee positions offshore either directly or through an international subsidiary – beyond the purview of RBI. All foreign banks, hedge funds and currency speculators are using such means to bypass the law.

Another such strategy is shorting or selling borrowed rupee currency with the intention of buying it in future at a lower price. If and when the currency actually falls the investor buys it for less than what he or she sold it for, thus making a profit. While most speculative activities involving the Indian Rupee are occurring outside Indian borders some bets are being placed by traders in the exchange traded currency markets as well.

As per the Bank of International Settlement (BIS) there is a huge global foreign exchange market with daily average turnover of $ 5.3 trillion. The global foreign exchange market is even bigger than the global equity market. With 60 percent trading volumes Currency trading is the largest market in the world followed by commodities and the equity market. The daily turnover of Indian rupee is around $ 53 billion—1 percent of the global market. This includes rupee-US dollar transactions worth $ 50 billion.

Singapore, Hong Kong and London are the headquarters for this global over-the-counter (OTC) derivatives trading in non-convertible currencies since the 1990s. Singapore, the world’s fourth largest centre for foreign exchange trading and Asian hub for the trading in INR NDF worth USD 150–200 mn per day besides Indonesian rupiah, Malaysian ringgit, Vietnamese dong and Thai baht. The volume of daily trading of Indian rupee in London skyrocketed 250 percent to reach $5.2 bn in 2012, in five years. Lately Dubai and Bahrain too have taken a lead in rupee NDF. Despite advances in electronic trading, most transactions are still done over the phone in Singapore’s old-fashioned NDF market.

Speculation in the NDF market plays a major role in pushing down a currency, widening current account deficit (CAD) and capital outflows. It’s an open secret in the currency market that large FIIs, MNC banks and corporate houses (with offshore trading capabilities) cut arbitrage deals - buying one-month forward in India and selling in NDF - to cash in on the difference.

Non Deliverable Forward (NDF) is one of the main reasons why the Indian rupee is not only weak but trailing behind the dollar and other currencies in the International markets over the last several months. This might be the reason why the battered Indian rupee hit life-time low almost on a daily basis some two months ago reviving painful memories of 1991, when faced with a severe foreign currency shortage, India pledged 47 tons of gold as collateral with the IMF for a loan. Prime Minister Manmohan Singh was the finance minister then.

No physical delivery of the underlying currency is involved and the opposite parties settle the contracts by paying the difference between the spot rate (decided by RBI) and NDF rate on maturity, usually in US dollars. Hence the term Non-Deliverable forwards (NDF). The NDF market was primarily meant to provide a platform to companies to hedge their foreign exchange risk but down the line, as it happens elsewhere, it has been hijacked by the speculators, gamblers and arbitrageurs who exploit the price differentials between offshore and onshore markets.

The massive 24×7 overseas foreign exchange forwards and forex swap market exerts pressure on the onshore currency markets to keep the rupee fragile. Every day the NDF markets in Hong Kong and Singapore open before the trading starts in Indian markets. Thus it sets the the price movement as well as bearish or bullish trading trend rupee in the domestic rupee market, sources say. “It will be a better world for us if there is no NDF market, but we cannot wish it away,” former RBI governor D Subbarao reportedly observed. “The rupee value is at times influenced by trading in non-deliverable forwards (NDFs)…,” the RBI Annual Report (2012-13) acknowledges the fact that there is a strong correlation between movements in the NDF and Indian spot rupee, particularly when the domestic currency is under pressure.

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