C. Shivkumar

Bangalore , June 15

DOMESTIC exporters have begun accepting long-term letters of credit (LCs) from foreign importers in a bid to ensure exchange rate stability.

Bankers said that this departure to long-term LCs, for 180 days and beyond, stems from the fact that there are no compulsions on exporters to repatriate foreign currency, unlike in the past.

This is on account of the comfortable foreign exchange reserves, currently at $139 billion.

But traders said that this strategy of long-term LCs was being done in a bid to ensure exchange rate stability and maximise earnings.

Bankers said that this was also helping the domestic markets from large-scale build-up of foreign currency-induced liquidity.

This was also one of the major factors behind forward premiums being inverted - low premiums for long deliveries and high premiums for short deliveries. Currently, the premiums for short ends - - one to three months - - are about 1.5 per cent, whereas for six months and 12 months, it is 1.3 per cent.

Yet, despite the low forward premiums, few exporters have resorted to taking forward cover unlike in the recent past, anticipating steep appreciation of the rupee. Bankers said that several exporters had also switched over to the euro over the last two years, in line with the export destination. These exporters have so far benefited from the euro's appreciation.

The outlook for the euro against the rupee and the dollar has remained bullish despite the recent spikes, when it shed about five per cent against the dollar.

It was these exporters who preferred long-term LCs. A large volume of exports goes to European destinations, where the invoicing is done in euros.

However, the bulk of the imports are invoiced in US dollars, since oil is the single largest import item.

Accordingly, the sources said, the demand for dollars is expected to remain high, especially coinciding with the oil import schedules.

But oil importers seldom take long forward covers and prefer to remain more at the short-ends or in the spot markets.

Many, however, have begun leaving their positions open, anticipating the rupee to remain strong in view of the strong export-led inflows.

Corporates also preferred to leave their positions open for making the debt service payments on external commercial borrowings, for the same reasons, bankers said.

It was only on the FCNR loans advanced to corporates that domestic banks are insisting on forward cover. But there are not many takers for FCNR loans, the bankers said, the reason being the high cost involved.

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