Readings: EM currencies, Risk arbitrage, Repo rate cut
Exporters in emerging markets are hoarding dollars as losses on currency bets worsen the slump in the South Korean won, Brazilian real, Mexican peso and India’s rupee.
India’s biggest carmaker, Maruti Suzuki India Ltd., plans to wait for a weaker rupee before bringing profits home from outside the country.
Mumbai-based Sundaram Multi Pap Ltd., which makes school note books, is one of 12 companies that filed lawsuits against banks accusing them of hiding risks on the currency products they marketed.
- The Deal: Spread too far
Risk arb is essentially an M&A insurance business. When arbs buy into an announced merger, they accept the risk of losing an M&A premium if the deal does not close. To accept that risk, arbs charge a premium — the deal spread. Typically, that spread is a function of the cost of capital and knowable issues, such as antitrust and the time value of money. However, market turmoil, teeth-rattling volatility and government interventions in banking threw those risk assessments into disarray.
Redemptions have taken their toll, as funds have been forced to raise cash or have been caught on margin with failing or troubled brokerage companies.
. . . index funds have also been selling. When indexers are not willing to take risk, the selling becomes indiscriminate and the arb market is not big enough to absorb the volume.
Whatever can go wrong will go wrong.
- Business Standard: RBI cuts repo rate by 100 bps
The Reserve Bank of India (RBI) today lowered the repo rate, or the rate at which it lends to banks, by 100 basis points to 8 per cent. The reduction, the first since 2004, is effective immediately, RBI said.
Thanks to the RBI’s steps the liquidity conditions in the markets have eased a little with the weighted average call rate, according to data on the Clearing Corporation of India website, at 6.80 per cent. Call rates had touched 23 per cent on October 10 and banks have been wary of lending in recent weeks.
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