NEW DELHI: The Indian forex market is disrupted after the government asked state banks to protect their dollar deposits due to a tax dispute.
Authorities have asked banks to protect their dollar deposits, fearing Britain’s Cairn Energy Plc could seize India’s offshore assets after winning an arbitration decision, according to people with knowledge of the matter.
The move resulted in a sudden flood of dollars into the Indian banking system, with state banks staying away from receiving the greenback in the futures market. As a result, the one-month forward premium on the currency pair jumped up to 10%, on an annualized basis on Tuesday, double the year-round average.
“There are no cash receivers in the market, everyone is a payer,” said Anil Kumar Bhansali, treasurer at Finrex Treasury Advisors. Dollar “cash levels are high. So short-term premiums are also high.
Lenders have not engaged in U.S. dollar purchases in the futures market since forecasts last week, the sources said, asking not to be identified to discuss private deliberations. State banks are the usual counterparties for exchanging the two currencies.
Cairn Energy may push global authorities to seize Indian assets if the South Asian nation refuses to honor an arbitration award in a $ 1.2 billion tax dispute, according to a letter the company sent to the top- Indian police station in the UK earlier this year.
Cairn Energy said in March that it was considering three options, including talks with the government, preparing for a possible application and the possibility of monetizing the price, in part or in full, to a third party. No decision has yet been made, a company spokesperson said on Tuesday.
The surge in dollar liquidity was compounded by the accumulation of foreign funds in the initial public offerings.
The Reserve Bank of India did not immediately respond to an email seeking comment. A call to a spokesperson for the Ministry of Finance outside of office hours was not answered. – Bloomberg