Indian authorities asked state-run banks to protect their dollar deposits on concern they could be frozen if Cairn Energy Plc moves to seize India’s offshore assets as part of a tax dispute.
Lenders aren’t committing to U.S. dollar purchases in the forwards market since this guidance last week, the people said, asking not to be identified discussing private deliberations. U.K.-based Cairn Energy can push authorities to impound Indian assets if the South Asian nation declines to honour an arbitration ruling in a $1.2 billion tax dispute, according to a letter the company sent to the Indian High Commission in the U.K. earlier this year.
The advice from Indian authorities came ahead of a summit on Tuesday between Prime Minister Narendra Modi and his U.K. counterpart Boris Johnson.
Cairn had said in March it’s considering three options, including talks with the government, preparation for possible enforcement, and potential to monetize the award, either partially or in full, to a third party. “As yet, no decision has been taken,” a spokesman for the company said Tuesday.
The banks’ decision to avoid adding more dollars to their offshore account has roiled India’s exchange rate in recent days because state-run banks are the usual counterparties who swap rupees into dollars and their absence makes the forward trade more expensive. The one-month USD/INR premium rose to as much as 10% on Tuesday on an annualized basis, from 5.41% on Thursday.
The surge in India’s USD/INR premium has been worsened by an abundance of dollars from IPO-related inflows.
The Reserve Bank of India didn’t immediately reply to an email seeking comment. A call to a finance ministry spokesman outside business hours wasn’t answered.