The rupee may have lost 4% against the dollar since August 11, but the currency is holding firm in the forward market as is evident from the unmoved premiums in the same period.
To be sure, the sharp fall of the currency had triggered increase in hedging by importers in the near tenures such as one-month and three-month and forward rates have moved in tandem with the rupee.
The outright premium to book a one-month forward dollar/rupee contract has remained around 40 paise over the spot dollar/rupee, while for the three-month tenure, the premium has been around 110 paise. However, given that fluctuations in the domestic liquidity are also priced in, the implied yield in both the tenures has swung within a wide range of 20 basis points.
The rupee has weakened 4.03% since August 11, when China announced its landmark devaluation of yuan. With the Chinese currency devalued thrice, the rupee had plummeted to hit a two-year low. The currency ended at 66.46/$ on Friday, down 0.35% from the previous session. During that time, many importers had stepped up their dollar purchases and hedged albeit only for the short-term using forward contracts up to three months.
“We saw hedging activity increase by importers but these have been in the near tenures,” said Ananth Narayan G, regional head of financial markets for South Asia at Standard Chartered Bank.
Currency dealers said that with most players in the forward market being end-users or companies rather than banks or financial punters, the premiums have hardly moved because demand from corporate depends on their expected export or import realization. Further, the Reserve Bank of India’s comments that it would not hesitate to use forex reserves to stabilize the rupee has given companies confidence that the currency may not weaken sharply in the coming months.
“Definitely given that our fundamentals are better than before, corporates do not expect a big fall in the rupee. Also given that more economic data is due from the US which could give clues on the Fed’s move, many are not taking big positions,” said NSVenkatesh, chief financial officer and head of treasury at IDBI Bank.