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Indian forex traders are concerned about the US dollar crisis as equity outflows increase

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News Tech: Pedestrians pass a currency exchange office in Mumbai, India, on Thursday, June 28, 2018. The Indian rupee fell to an all-time low as a recovery in oil prices and a selloff in emerging markets weighed on the currency of the world’s third-largest oil consumer. Photographer: Dhiraj Singh/Bloomberg Indian forex traders are bracing for a further dollar shortage, weighed down by record outflows from the country’s stocks and a deterioration in external finance.

The Reserve Bank of India said last Friday it was trying to meet demand with its reserves. “The cash dollar shortage and lower forward premium could become permanent for the rupee,” said Madhavi Arora, chief economist at MK Global Financial Services. The rupee has fallen 5.8% this year, hitting a record low of 78.9837 per dollar on Wednesday. The RBI is trying to make up for the fall as the Fed rate hikes drain capital out of emerging markets, but its efforts may contribute to the dollar shortfall.

According to Mizuho Bank and IFA Global, some Mumbai-based banks faced a dollar crisis last week as outflows from Indian assets added to the pressure. The rupee hit an all-time low against the dollar on Wednesday. Foreign investors withdrew $28 billion from Indian stocks this year, but rising oil import costs and a widening current account deficit are pushing everyone from investors to businesses to rupee dollars at the same time.

The RBI recently stepped up its intervention in the futures market to slow the rupee’s depreciation. This is a strategy aimed at closing the dollar forward book rather than spending large reserves in the spot market. This pushed the annualized 1-year USD/rupee premium below 3%, the lowest level in over a decade. However, this has spurred importers to buy dollars in the futures market, helping to tighten the dollar. A central bank spokesman did not immediately respond to an emailed request for comment.

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