Are big ticket dollar bids adding to rupee volatility

Saikat Das
Moneycontrol.com 

The big ticket dollar bids by public sector units (PSUs) to meet their business requirement, is adding volatility in the dollar-rupee forex market. This creates artificial demand for the greenback. The Indian rupee shows no sign of respite from its free falling, despite repeated measures taken by the Reserve Bank of India (RBI).
"Any big ticket bidding for outward remittances should be scrapped," a market participant working with a new generation private sector bank told Moneycontrol.com.
"PSU companies need dollar supply to run their business. They come to the forex market to bid for it. Every bank then starts building up positions to cater to their need. Ultimately, it leads to increased volatility followed by higher dollar demand. Instead, dollars should be purchased at RBI's reference rate," he suggested. Every day, RBI gives a reference rate for dollar-rupee. This works something like this:
If a state owned company requires 30 million dollar and approaches ten banks for the bidding process. Then all those banks will try to mod up certain portion of that bid amount (say 50%) before the bid process starts on a particular day. Accordingly, they will start buying dollar from the market. Assuming that ten banks are buying dollar from the market simultaneously, the demand for dollar will actually be 150 million (50% of 30 million multiplies by 10).   
However, only one bank gets the bid allotment. Later, higher trading activities follow with the rest nine banks intending to sell their stock of dollars at a higher rate. At the same time, the successful bidder too will buy the residual portion of the bid amount at a relatively higher rate.
"The artificial demand will increase volatility in the currency market. There has to be some policy guidelines to check this" said Arun Singh, senior economist, Dun & Bradstreet Information Services (India).
"Rather than RBI actions, the government should bring in some reform measures. This will create a positive sentiment among overseas investors, who are not really investing in India. However, the situation is not warrant for extreme measures like introduction of sovereign gold bonds. From August-September onwards, rupee should appreciate, backed by some stability in global economy and improved domestic inflation by then."
Rupee touched all time low at Rs 56.22/$ on Wednesday before closing at 56.00/$. Due to a particular bid of 12 million dollar by a PSU company the local currency moved 10 paisa during the day's trading session. It is considered to be very significant in the current context, dealers said.
"The inflated demand is much higher than the actual outflow. The market gets wrong information for a big outflow as against the actual demand. There is spiraling effect to this phenomena," said a forex dealer endorsing the view to check the practice.
The local currency on Thursday again touched a fresh all time low at Rs 56.30/$. Later, it closed the day at Rs 55.65/$ erasing its early losses.
saikat.das@network18online.com Also Read: Will partial rollback of petrol price hike impact market?