Fall in forward premiums adds to Indian rupee's challenges
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The Indian rupee, already under pressure from high U.S. Treasury yields and volatile oil prices, is now having to contend with a drop in forward premiums, owing to worries over dollar liquidity.
The rupee is quoting at 83.2825 to the U.S. dollar, having avoided succumbing to its lifetime low of 83.29 over the past several sessions likely due to, say traders, the Reserve Bank of India's regular intervention.
The weeks-long jump in U.S. yields to multi-year highs and the volatility in oil prices since the Middle East conflict broke out has forced the RBI to intervene almost on a daily basis, according to traders.
Now, the fall in forward premiums over the past month is being seen as another worry for the rupee and the RBI.
"Theoretically, low premiums make the RBI's job in managing the rupee a bit more difficult. Importers may be more willing to hedge and betting against the rupee costs less," said Dhiraj Nim, a forex strategist and economist at ANZ.
"Having said that, for that dynamic to play out, the market has to believe that the RBI will not keep the rupee at a particular level."
The fall in forward premiums has been largely fuelled by concerns over the dollar's liquidity. That is evident in the rupee/dollar cash swap market, which banks use to manage their daily rupee and dollar liquidity mismatches.
The depressed dollar/rupee cash swap rate prevailing in this market implies high demand for cash dollar.
The imputed rupee interest rate from the swap rate has consistently been below that of the domestic call money market, according to a treasury asset-liability manager at a private bank.
It is the near premiums that have felt the biggest impact of the depressed swap rate. The 1- and 2-month dollar/rupee forward premiums are at over a decade-low.
The far forwards, however, have fared relatively better, with the 1-year premium at its lowest since August.
"The fall in premiums provides one more factor for USD/INR to move higher," said Kunal Kurani, associate vice president at forex advisory firm Mecklai Financial.
Kurani pointed out that a large part of importer activity is for less than three months.
