Companies are rushing to book forward covers for all transactions in the foreign exchange market. The trigger for this development is the extreme volatility in the spot market, with daily intra-day movements of the rupee vis-a-vis the dollar veering around 50-60 paise.

The volumes in forward contracts have more than doubled this week.  A conservative estimate by a bank puts the daily volumes at  $700-800 million versus $200-300 million earlier.

While importers are busy booking forward cover for their payment obligations, exporters are covering their receivables at every new downward spike in the rupee-dollar exchange rate.

This essentially reflects the outlook on the rupee. Companies now feel that it may slip further against the dollar. About a fortnight back, it was felt that there would only be a one-way traffic for the Indian currency -- it could gain strength against the greenback. The rupee hit a 51-month high of 43.5450/5500 per dollar on April 7.

The Indian unit lost about two per cent this week to close virtually unchanged at 45.37/39 on Wednesday, down from 44.65 last Friday.

Volumes in the currency options and interest rate swaps have, however, slowed down owing to the uncertainty in interest rates and currency rates. "Political uncertainty has made the outlook go haywire," said a dealer.

U Venkatraman, head of foreign exchange and money market, IDBI Bank, said the sentiment would remain nervous and volatile and with poll results coming in, one will see fortunes gyrating for political leaders and markets.

With two major events -- government formation and the announcement of the monetary policy -- lying ahead, the underlying market sentiment is weighed by apprehensions that foreign institutional investor inflows and the pace of reforms might slow down if the National Democratic Alliance government is not voted back to power.

In such a volatile scenario, the rupee might break the 45.50 per dollar level, he said.

Dealers felt that the spot rupee would appreciate once the elections results are out and a government is formed. At that point of time, exporters could unwind their positions to book profit by canceling forward contracts.

However, counter trades are leading forward dollars deeper into discount as demand for forward dollars by imports could not match the rush by exporters to sell dollars and book receivables.

Despite an increasing volume of transactions, the discount on the forward dollar is increasing, coupled by a shortage in the cash dollar market as well.