MUMBAI, Aug 25: The Reserve Bank of India intervened in the forex market for the second successive trading day on Monday to calm the volatility in the spot and the forward markets.

The bank pumped in $50 million to $100 million on Monday to smoothen the weakening of the rupee, which closed at the 36.25/30 level after touching 36.40/42. On Friday, the apex bank had made a token intervention after the rupee touched Rs 36.50 to bring in "calm to a volatile market". Over the last seven days, rupee has depreciated by 1.68 per cent against dollar.

The volatility in the forex market had an immediate impact on the gilts market. Trading on the National Stock Exchange (debt segment) was brisk as a host of foreign banks and private banks led by BNP, Societe Generale, Bank of Nova Scotia, ABN-Amro and Bank of Punjab were selling gilts to take up dollar positions in the forex market. Prices in the medium and long-term securities fell by huge margins.

Opening the day at Rs 36.20/30 levels, the spot rupee continued to lose ground to the greenback and reached Rs 36.40/42 levels on Monday. At this point, the RBI entered the market selling dollars maturing in September to create a psychological impact on the spot rupee.

"The purpose was fulfilled and the rupee strengthened to Rs 36.30/36. When it was again showing signs of weakening, the RBI sold spot dollars towards close of the day's trading. This saw the spot rupee settling at Rs 36.25/30 levels," a dealer with a private sector bank said.

According to dealers, the RBI intervened in the near forwards to send out a signal that it does not want the rupee to weaken sharply so fast. "It wants to provide comfort and bring in a gradual weakening," a treasury chief in a foreign bank said.

The most interesting development in the forex market on Monday was the hectic activity in one-year forwards. The huge arbitrage opportunity that exists between one-year forwards in the local markets and the non-delivery forwards (NDF) in the overseas markets has increased and more and more corporates are taking advantage of it, leading forex dealers said.

"At present, the rupee is valued at Rs 41 against the dollar in the NDF against Rs 38.85 in the local market. This arbitrage opportunity is driving forwards up," a senior treasury official in a leading oil company said.

One-year forward premia opened at 240 paise and closed at 255 paise on Monday while six-month forwards gained by 5 paise to close at 113/117. The annualised premia for one-year forwards is 7.2 per cent while the six-month premia is higher at 7.7 per cent.

Forex dealers said that with the demand for one-year forwards rising among corporates, an alignment between six-year and one-year forwards will soon take place. "Ideally, six-month forwards should be lower than one-year forwards," a dealer commented.

In the gilts market, the list of securities that were badly hit included the 12.59 per cent gilt maturing in 2004 - traded at Rs 103.60, down from Rs 105.50 on Thursday. The 12.14 per cent gilt maturing in 2000 saw prices falling down to Rs 101.90 from Rs 103 on Thursday, and the 13.5 per cent gilt maturing in 1998 also saw a decline by 20 paise to close at Rs 102.60.

According to money market dealers, PNB Gilts was the biggest buyer on Monday as it bought the bulk of the securities sold by the foreign banks. Towards the close of the day, however, some of the gilts regained prices and there was buying interest at much lower rates from trading banks, dealers said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.