rupee: A jump in forward premiums could ease pressure on Rupee

Pressure on the rupee is expected to ease soon with forward premiums likely rising from decadal lows after the Reserve Bank of India (RBI) this week signalled its intent of minimal future interventions in the currency-derivatives market by easing instrument-level curbs to encourage potential dollar inflows. The local unit advanced Thursday against the US dollar.

“Forward premiums are bound to rise as banks would swap their deposits garnered from non-resident Indians through sell-buy forward contracts,” said Bhaskar Panda, executive vice president,

. “Actually, premiums had dropped artificially, putting pressure on the rupee’s exchange rate. Rising forward premiums are more of a correction and a blessing for the rupee.”

Forward premiums rose 7-9 basis points Thursday across one-month, three-month, six-month and 12-month maturities, showed Bloomberg data compiled by ETIG.

Rupee Closes at 79.18/$

The increases follow a suite of measures announced late Wednesday by the central bank to arrest the slide in the local unit and prevent imported inflation from worsening.

A basis point is 0.01 percentage point.

Around mid-June, the premiums had dropped to levels last seen in 2010-2011, ET reported on June 16.

A day after the RBI announced measures to shore up forex reserves and arrest the local unit’s free fall, the rupee gained 0.16% to close at 79.18 Thursday. It was the fourth best performing Asian currency for the day. The one-month volatility index dropped 11 basis points.

“Forward premiums had dropped due to the RBI’s intervention strategy,” said Anindya Banerjee, currency analyst, Kotak Securities. “That was creating an additional pressure on the rupee. The central bank seems to have delivered a masterstroke introducing NRI deposit relaxations, which will now likely serve both purposes.”

On behalf of the RBI, banks were seen selling dollars in the spot market after having entered into forward contracts through buy-sell swaps, aiming to sterilise the impact of spot market dollar sales. This helped lower forward premiums.

“More than spurring net foreign exchange inflows, these steps should help bridge any funding gaps arising from the ongoing foreign exchange outflows in the spot market against the RBI’s sale of forward dollars,” said Ananth Narayan, a senior India analyst at Observatory Group. “In turn, this should help stabilize USD/INR forward premium in line with interest rate parity.”

India’s reserves have shrunk nearly $50 billion from the peak of $642.45 billion reported in the week ended September 3 last year. It was at $593.3 billion on June 24. Central bank interventions had caused a drop in the dollar stockpile.

The US Dollar Index, or DXY that measures the strength of the greenback, is up 11.18 % this year, data from Marketwatch showed. Outflow of funds from India gathered pace with the US and other global central banks raising policy rates.

“Stability in the USD/INR forward premia market, in turn, should relieve any immediate downward pressure on INR,” said Narayan.

Despite the rise in trade and capital (spot) outflows and all-round global dollar strength, the rupee has outperformed other major currencies on the back of strong RBI (forward) market intervention.

The rupee, however, lost more than 6% this year, and is the seventh ranked Asian currency after the Malaysian Ringgit.

Foreign portfolio investors net sold $30.3 billion local securities this calendar year so far.

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