Rupee bias mildly negative with year-end flows, positioning in focus
The Indian rupee is expected to open in a narrow range on Monday, though most traders see the weekly bias tilted to the weaker side with year-end outflows and positioning likely to weigh on the currency.
The 1-month non-deliverable forward indicated the rupee will open largely flat, having settled at 89.85 per dollar on Friday.
Conversations among bankers are focused on two key factors: the magnitude of the Reserve Bank of India's intervention that reversed the rupee's slide from 91 per U.S. dollar and how much pent-up dollar demand has resurfaced in both onshore and offshore markets following that move.
Last week, the rupee traded in a 50-paise range of 89.44–89.94, declining 0.66% after a 1.3% rally the week prior.
"Our thinking is that sub-90 levels (on dollar/rupee) are difficult to sustain," a currency trader at a bank said, adding that he expects last week's weakness in rupee to persist.
Dollar demand linked to year-end NDF maturities is expected to keep the rupee under pressure, while interbank positioning remains skewed toward buying the pair on dips rather than looking for selling opportunities, he said.
Beyond spot, attention this week will be on moves in the overnight swaps market and forward premiums. Bankers said excess dollar liquidity is likely to make the cost of rolling positions from Dec. 31 to Jan. 1 volatile and inflated.
Forward premiums were particularly choppy last week, with the one-year implied yield trading in a wide 2.78–3.29% range.
Heavy dollar demand in the NDF market, along with concerns over the year-end rollover cost of excess dollars, had pushed premiums to multi-year highs before the Reserve Bank of India’s FX swap announcement helped cool them, bankers said.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 90.26; onshore one-month forward premium at 40 paise ** Dollar index at 98
** Brent crude futures up 0.9% at $61.2 per barrel
** Ten-year U.S. note yield at 4.13%
** As per NSDL data, foreign investors sold a net $173.4mln worth of Indian shares on Dec. 24
** NSDL data shows foreign investors sold a net $34.8mln worth of Indian bonds on Dec. 24
