While the Reserve Bank of India was fire-fighting to shore up the rupee and mutual funds were hit by redemption pressures last week, some offshore funds, investment banks and financially savvy companies were merrily making money.
They were betting against interest rates falling and seemed to have struck bull’s eye. Their method was to use a hedging instrument called overseas non-deliverable overnight indexed swap (OIS) — which is the financial market’s equivalent of two travellers exchanging their tickets to alter their destinations.
“There were some market players who were able to take contrarian call in the overseas OIS market,” said Anoop Verma, Money Markets, DCB Bank.
Overnight Index Swaps are instruments that allow financial institutions to swap the interest rates they are paying without having to change the terms of contracts in place with other financial institutions.
Some players whose loans were in floating rates and were expecting the interest rates in India to come down (like a big chunk of market participants) entered into swapping agreements with other players (who had floating rate loans) to pay a fixed rate. The latter took a contrarian call that rates will harden and agreed to pay fixed rates.
When the RBI surprised everyone by liquidity tightening steps to squeeze money supply and check a fall in the rupee, the ones betting against the expectations struck gold.
Experts believe that there were some signals that these people could have read.
“The RBI had lost around $11.8 billion of foreign reserves since the beginning of April this year, out of which $7.6 billion was foreign currency. It lost around $3.2 billion in the week ended July 12,” said Tirthankar Patnaik, India strategist and chief economist, Religare Capital Markets. “Despite all the measures taken, rupee was moving in one direction which led some people to believe that the RBI might take strong steps going beyond direct intervention in the forex market.”