The rupee’s fall to over three-month lows has driven forward premiums higher, making it difficult for importers to hedge their future payments. On Monday, the premium an importer had to pay to book a three-month forward contract to buy dollars was Rs 1.19 above the spot rate (63.49/$). This was higher than the Rs 0.67 premium a week ago. The benchmark 12-month forward dollar-rupee premium rose to 67.99/$ on Monday from 67.01/$ a week ago.
Part of the rise in premiums has been due to the rupee’s sharp fall over the last one week, which has given rise to bearish bets on the currency for the rest of the year, dealers said. The rupee weakened nearly 1% last week and ended at 63.49/$ on Monday. “A part of the rise in premiums is due to the rupee weakness. Of course, this discourages hedging by corporates now,” said a senior currency dealer at a large private bank.
“Rupee is weaker because NDF points have gone up. This is a sign that a lot of long-rupee positions have been cut,” said Hitendra Dave, head of global markets, HSBC. The offshore three-month non-deliverable forward premium has also risen. The offshore NDF rate predicts the rupee’s fall to 63.89/$ over the next one month and to 64.61/$ in three months.
Foreign investors and some big Indian companies with sophisticated treasury desks typically prefer to hedge in the offshore NDF market given the benefits of an unregulated and unfettered access to derivatives there. The onshore forward market is largely end-user driven with companies mostly using it for hedging. The level of speculative positions in the offshore market is far higher than that of the onshore market.
Premiums have been rising since the last one year because of the Reserve Bank of India’s dollar purchases. The central bank has intervened both in the spot and the forward markets to stem a potential sharp rise of the rupee. Between April 2014 and March 2015, the RBI bought a massive $82 billion dollars from both the spot and the forward markets.
Meanwhile, the yield on the 8.4% government notes due July 2024 fell 1 basis point, or 0.01 percentage point, to 7.78%, according to prices from the RBI trading system.
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