P-Note imbroglio benefits $, future tense for Re

Source : Moneycontrol.com

The initial reaction was very negative for the rupee and positive for the dollar, analysts said.

In early morning trade, the rupee had to react to Sebi’s P-Note move before stock markets opened. For that one-hour, we saw the rupee dwindle by about 1%. This 50 paise fall in early morning trade was largely triggered by the NDF, or non-deliverable forwards, market.

The offshore market for the rupee is really those constituents that are really being hurt by the P-note clampdown. They are the people who are coming in and buying dollars, analysts said, in anticipation that they may have to exit.

Banks followed by taking similar position because the expectation was that it is going to be rupee negative, analysts said. Therefore, banks and FIIs were buying NDF, the offshore market was also buying. When the stock market opened, it crashed and FIIs and banks continued to buy, they added.

After the recovery, there was a semblance of sanity, analysts said. The rupee came back quite smartly by about 20-30 paise and ended down about 0.25%. The stability is coming from the fact that exporters are coming in and selling at higher levels for the dollar, but this does not mean that stability will reign. The rupee markets are very much watching what the stock market regulator is saying and what the stock market participants are doing.

What will it mean if FIIs can’t issue fresh P-notes and all top P-notes issuing FIIs have pretty much reached the level of 40% which Sebi has allowed for total investments in the form of P-notes. Since they have hit that limit, fresh P-notes can’t be issued so that worry is hitting them. Once that starts impacting the stock market and plays it self out in the next few days, the rupee impact will come and the forex market is extremely confused now, analysts said.

A bank wouldn’t know whether it should go long or short on the dollar at this point in time. They are only watching for signals and for clarifications from the stock market, analysts said. You are seeing some kind of recovery in the stock market but you can’t mistake this for any long-term direction, they added.