Rupee’s forward premiums may stay above 2% ahead after RBI’s intervention

Indian rupee's forward premiums are factored to pick up further after the RBI's recent intervention through public sector banks which bolstered them from their multi-year lows. On Wednesday, the 1-year USD/INR yield crossed 2% floating near its highest level in a month. Currently, the rupee is near 82.77 levels against the US dollar, slightly weakened from the previous day.

It needs to be noted that the 1-year USD/INR implied yield is above 45 basis points from its decade-low hit which was witnessed on December 7 when RBI announced its latest monetary policy where a softer rate hike of 35 basis points was imposed in policy repo rate to 6.25%.

A Treasury head of a private lender told Reuters that the RBI looks comfortable with the current level of forward premiums, especially since it has lifted informal restrictions on banks for trading in the non-deliverable forward (NDF) market. Further, he added that "premiums are likely to stay elevated going forward," explaining that RBI is getting comfortable with higher levels of premiums.

Also, Abhishek Goenka, chief executive of IFA Global told the news agency that RBI permitting banks to resume offshore-onshore arbitrage resulted in forwards continuing to get paid. The banks have received NDF points and paid onshore.

When premiums rise it leads to a higher cost of hedging for importers which in turn becomes more attractive for exporters to hedge for the same level of spot and thereby supporting RBI in controlling the downside correction in the rupee.

As per RBI's bulletin for December 2022, the central bank's outstanding net forward position in US dollars drastically dropped to $241 million by end of October 2022. Compared to the previous month, the decline is by a whopping $10.182 billion in October. Notably, RBI's net forward book has nosedived by $65.55 billion from $65.791 billion in March 2022.

In the bulletin, RBI said, the appreciation of the US dollar this year, which precipitated large-scale depreciation of all major global currencies including the Indian rupee (INR), has drawn wide attention. It is important to make an objective assessment of the movement of the INR in the context of global and domestic macroeconomic and financial market developments. Through this episode of US dollar appreciation, the INR’s movements have been the least disruptive, relative to peers.

RBI's bulletin added, INR has appreciated against all other major currencies except a few."