Mumbai: The rupee swivelled in thin band during trade on Monday tracking a choppy stock market, but forward premiums rose on expectations of another hike in key rates later this month by the Reserve Bank of India (RBI), to top up its last Friday’s rate move.
India’s one-year onshore dollar premium closed at 144.50 points, after rising to 146 points earlier, its highest since 28 June and above its previous close of 132.25 points before the rate hike.
The RBI raised interest rates almost a month earlier than expected last Friday, and analysts said it would likely follow up the quarter-point hike with another move on 27 July, when it reviews its monetary policy, given concerns about inflation hovering above 10%.
The market expects at least another 25 basis points hike at the RBI’s policy meeting, with a small section even predicting a 50 basis points increase.
“Initial reaction is that we may see paying (of premiums) coming, but this should taper off. The market is expecting further hikes, that is why there is this biddish momentum,” said Vikas Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
He said the one-year onshore annualized dollar premiums are likely to stay in a range of 2.80-3.25% until the policy review later this month.
The spot rupee closed at 46.78/79 per dollar, little changed from its previous close of 46.77/78, tracking choppy domestic equities.
“Volumes are low, so market was highly choppy, but there was a big move in the forwards post the rate hike,” said Nitesh Kumar, an interbank dealer with Development Credit Bank.
Dealers said after mid-July, liquidity could start improving helped by government bond redemptions and interest payments, which would likely bring short-end premiums down.
“Guess the best trade now would be to receive three months and pay nine months because the near-month yields are much higher than the 9-month yields,” DCB’s Kumar said.
Near-month rates would start easing when liquidity improves, while the long-end would stay higher as market expects another rate hike this month.
Dealers said choppy shares provided little direction.
Indian shares eased on Monday after a surprise rate increase by the central bank, with trading volume low following a nationwide strike that disrupted businesses and traffic.
Foreign fund moves into and out of the stock market have a large influence on the rupee’s fortunes. So far this year, foreign investors have bought a net $6.8 billion, in addition to last year’s record $17.5 billion inflow.
Foreign exchange market volumes were also below average due to the nationwide strike called by Bharatiya Janata Party (BJP) and Left parties to protest against the recent hike in fuel prices.
Dealers said the dollar’s mild gains versus majors weighed on the spot rupee. The dollar index against six major currencies was up 0.2%.
One-month offshore non-deliverable forward contracts were quoted at 47.00, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 46.9725 and 46.9750 respectively, with the total traded volume on the two exchanges at about $4.5 billion.