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While the shortage of major currencies on the foreign exchange market continues to raise concerns, the practice of “forward rates” by banks and exchange dealers is further aggravating the situation. Some also mention the risk of the black market.

A banker, a currency specialist, is categorical. On condition of anonymity, he indicates that the current situation is critical. “Already, there is a strong appreciation of major currencies such as the dollar, the euro and the pound sterling,” he says. On Tuesday, July 2, he cites, the dollar was selling at Rs 48.35, the euro at Rs 52 and the pound sterling had already crossed the Rs 60 mark. Following the trend, the banker points out that currencies will appreciate further in the days, even weeks to come.

To take advantage of this situation and make good deals, some money changers and commercial banks are practicing the “forward rate”, also known as the forward rate, he observes. The “forward rate”, explains the banker, allows money changers as well as banks to sell currencies at a value beyond the official rate. “For example, recently, a currency exchange office sold the euro at Rs 52.50 while the price was officially displayed at Rs 51.50 that day”, he indicates. If the difference may, at first glance, seem insignificant, at only one rupee, “this type of transaction is done in large amounts, i.e. from 50,000 euros and more. So, the profit is also enormous”.

A legal practice

The “forward rate” is a completely legal practice, the banker continues. “For example, if a company knows that it will need dollars in six months, it can enter into a forward contract to buy these dollars at a fixed rate today,” he emphasizes. However, he believes that some credit institutions and currency traders abuse this practice, which further aggravates the shortage of foreign currency on the market.

Faced with this situation, the Bank of Mauritius (BoM) must intervene and establish strict guidelines to ensure that there is no abuse, insists the banker. The losers of the “forward rate”, he argues, are mainly those who cannot afford to buy in large quantities: “These include small traders, those who go on trips and those who continue their studies abroad.”

Beelall
Beelal Baichoo.

Compliance consultant Beelal Baichoo says the currency shortage is not new. “If you talk to traders, importers and other operators, you understand that this shortage has been going on for quite some time,” he says. In fact, says Amit Bakhirta, CEO of ANNEAU, the hard currency crisis is partly due to a shortage that has accumulated since the COVID-19 pandemic and partly due to the BoM’s preference for a weaker currency. “This is amplifying the supply-demand shock in the banking system, where commercial banks and market participants have lost confidence in the rupee. They are increasing the demand for stronger currencies, while their supply has remained extremely limited,” he explains.

Moreover, he adds, in the current liquidity squeeze, exporters are less likely to sell and dump their “precious” foreign exchange, fearing further weakening of the rupee. “This leads them not to sell their foreign exchange and hoard it, similar to commercial banks, where the more the rupee depreciates, the higher their foreign exchange earnings from segment B activities, and hence they are likely to report higher rupee-denominated revenues and profits,” says Amit Bakhirta.

From an interest rate differential perspective, the carry of the US dollar and the euro is more attractive to investors today than the rupee. So, he continues, globally, as the monetary environment tightens, a liquidity crisis is expected. “And so this downward spiral that is not resolved is fueling, among other things, a catastrophic negative reputation of our international financial jurisdiction,” laments Amit Bakhirta.

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