India’s Forex Business Paralysed After Demonization Cash Crunch

The demonetization of high-value currency in India has led to a sharp fall in average forex sales in the country as a result of forex traders suffering from a cash crunch. Money changers across the country have remained shut stating that they don’t have the cash to buy foreign currencies and equally to pay Indian currency buyers. People with foreign travel plans are struggling to get forex nationwide.

Foreign exchange traders have not been exempted by the RBI for accepting demonetized notes affecting trading volumes severely. According to local media, forex dealers typically handle 60-65 percent of their transactions in cash and in some cases up to 75-80 percent.

Given the current situation, money changers have become risk averse and are now trading conservatively. Abdul Hadi Shaikh, CEO of Fxkart.com which is an online aggregator of authorized foreign exchange dealers said that based on a survey conducted by them across 15 money changers to assess market conditions, it was clearly evident that the transaction volumes had dropped significantly.

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In a statement Abdul Hadi Shaikh said

We found overall sales of foreign exchange have reduced by 50-75 percent on an average. Full-fledged money changers (FFMCs), who are relatively small forex license holders, are not buying foreign currencies from larger license holders like authorized dealers category II (AD IIs). Confirmed requests for foreign exchange from travel agents are getting abruptly cancelled

Forex operators are finding it difficult to gather the requisite cash given the restrictions placed by the government on withdrawal amounts. The limit has been recently increased from Rs 20,000 to Rs 24,000. Shaikh also pointed out that the demonetization has resulted in the RBI keeping a close eye on transactions related to currency exchange and has been requiring daily reports.

Bhaskar Rao, Executive Director of Bangalore-based Orient Exchange echoed a similar view saying that purchase of foreign currencies was at a standstill resulting in poor supply of the currencies which in turn affected the supply of foreign currencies by more than 30 percent. The cash crunch has caused a fall in the value of the rupee, currently at Rs 70 for a dollar from the Rs 66-67 range it was previously. In grey market trading, the dollar has risen to as much as Rs. 128. According to media reports, several investors and businessmen are buying foreign currencies and gold from the black market in order to dispose of old currency notes, resulting in a scarcity of foreign currency.

Charlie Harrison

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