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Nirav scam fallout: Rupee under stress

Nirav modi---reuters
Bankers said dollar demand has been steady since March after the ban.
MUMBAI: The repercussions of the Rs 14,000-crore Nirav Modi scam are being felt months after it came to light as it has increased dollar demand, adding to the rupee’s woes.

Companies that used letters of undertaking (LoU) to raise shortterm credit abroad have had to wind them down by paying hard cash after the RBI directed banks to stop issuing these instruments in March. “Since these LoUs cannot be rolled over, companies have to pay back the bank in dollars, which is leading to demand for the US currency. This is one of the main reasons for the pressure on the rupee,” said MS Gopikrishnan, head-forex, rates and credit trading India at Standard Chartered.

LoUs were bank guarantees through which a bank allowed its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. They were of three to six months tenor and were mostly rolled over at maturity.

To be sure, the current bout of rupee weakness is due to a host of factors like global trade uncertainties, flight of dollars out of India, higher oil prices and increase in interest rates in developed economies.

There are also no official numbers of how many LoUs are still outstanding or have to be paid back.

A report by State Bank of India (SBI) chief economist Soumya Kanti Ghosh in March estimated that there could be Rs 20,000 crore to Rs 40,000 crore of outstanding LoUs.

Bankers said dollar demand has been steady since March after the ban and it is also possible that some companies move to other instruments like letters of credit (LCs).

“This is one factor but not the major one. Ultimately, lower dollar inflows and the fact that India is going to end with a current account deficit this fiscal is weighing on the rupee,” said Piyush Wadhwa, head of trading at IDFC Bank.

The Indian currency has fallen 7.84 per cent so far in 2018. Only the Russian ruble, Brazilian real, Turkish lira and Argentinian peso have fallen more. Rupee has touched an all-time low of 69.09 per dollar during this bout of weakness and is likely to remain weak during the major part of 2018.

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