In the wake of the measures that the RBI took two weeks ago to prop up the rupee, the one-month onshore forward rate and the offshore non-deliverable forward rate had converged and the difference was reduced to as little as 5-10 paise until last week. However, the gap has widened this week. The one-month onshore forward dollar/rupee rate was quoted around 60.93/$ while the (non-deliverable forward) NDF rate was around 61.40/$ on Wednesday.
The offshore market currently is saying that it is going to ignore the recent measures of the RBI. The offshore market is very confident in its analysis," said a senior treasury official at a UK-based bank. Currency dealers said that if the gap persists between the onshore and the offshore rates, the central bank will have to take further measures to curb th arbitrage that is threatening to resurface.
Indeed, RBI deputy governor HR Khan had said that the central bank could take more measures if speculative activity involving the currency futures and the offshore market does not come down. One thing that we are trying to do is in the currency futures market, there is a lot of position taking, which we have curtailed and, by month-end, this would reduce hopefully. If not, further measures would be taken," Khan had said on Tuesday.
In a post-policy press conference on Tuesday, RBI deputy governor Urjit Patel said that the central bank's measures have had a positive impact on the rupee and noted the convergence of the onshore and the offshore rate.
However, if the NDF market is to be believed, the rupee could weaken beyond 61.40/$ in a month's time even though the onshore one-month forward is reflecting a rate of 60.90/$. The less liquid one-year NDF rates are forecasting a fall to 65.50/$ by the end of one year which is close to the one-year onshore one-year forward rate of 65.25/$.
In the spot market, the rupee recovered to close at 60.40/$ on Wednesday after coming within a hair's breadth of its all-time low levels.
Over the last one-two years, the intraday differences between the onshore and the offshore market have increased manifold. We earlier used to have 5-10 paise difference. Today, it can go to as much as 50 paise and it is minefield for arbitrage," said a forex trader at a US-based bank.
Typically, market participants who have access to both offshore and onshore derivatives market aim for arbitrage gains taking advantage of the gap between the two rates at a given point during the day. Such arbitrage transactions together with undue speculative positions had exacerbated the rupee's fall earlier in July.