RBI’s move to ban LoUs, allegedly used by used by Nirav Modi and Mehul Choksi to defraud PNB, may push up short-term dollar demand and increase seling pressure on thr rupee
NEW DELHI – Traders can add one more reason to sell the Indian rupee. Stung by the over $2 billion fraud at Punjab National Bank (PNB), the Reserve Bank of India (RBI) banned lenders from issuing a key import finance tool, a move that may push up short-term dollar demand.
The central bank barred lenders from issuing guarantees in the form of letters of undertaking (LoUs) to overseas banks on Tuesday as it clamped down on the import-financing avenue used by Nirav Modi and Mehul Choksi 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% to 65 against the US dollar on a day other Asian currencies rallied amid the political turmoil in Washington. The premia on buying one-year forward dollars dropped for a third day as traders unwound positions to meet their immediate needs. The rupee has been battered this year by the nation’s worsening trade deficit and the bank scandal that’s dented foreign investor confidence.
Before the RBI’s decision on Tuesday, banks were allowed to issue such guarantees to overseas suppliers and banks up to $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.”
