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Dollar-rupee forward premiums declined on Thursday after India's central bank said it would infuse rupees into the banking system daily, which bankers said would reduce the need to conduct dollar-rupee buy/sell swaps.

The Reserve Bank of India on Wednesday said it will conduct variable rate repo auctions, through which it lends funds to banks, on all working days until further notice.

WHY IT'S IMPORTANT

Forward premium levels are an important factor that companies consider when managing their forex risks. The level of the near-maturity premiums impacts the behavior of speculators when they wager on moves in the dollar/rupee pair.

CONTEXT

The RBI has been conducting buy/sell swaps in the forward market to negate the impact that their regular dollar-selling interventions have on domestic liquidity.

With the central bank now injecting rupee liquidity, the quantum of buy/sell swaps that it needs to conduct to manage liquidity will reduce, which in turn pushes down premiums.

MARKET REACTION

The 1-year dollar-rupee implied yield declined 3 basis points to an over-two-week low of 2.40% on Thursday while the 1-month forward premium declined to 21 paisa from 23 paisa in the previous session.

Rupee liquidity in the country's banking system stood at a deficit of 2.2 trillion rupees ($25.43 billion) on Jan. 15, after hitting an over-7-month high of 2.5 trillion rupees on Monday.

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The repo auctions will help ease the dollar-rupee overnight swap rate, which will have an impact across the forward premium curve, a senior trader at a state-run bank said.

($1 = 86.4950 Indian rupees)