Forward premium on the rupee has gradually started to recover with dollar availability improving, following a period of supply tightness in the spot market. Forward premium is the difference between the forward rate of the rupee and the spot rate. The one-year forward premium had declined towards the end of February due to an acute shortage of dollars in the spot market following a squeeze in the buyers’ credit post the PNB scam. Importers who were supposed to make dollar payments and relied on buyers credit, had rushed to buy dollars in the spot market to take care of their payables. Banks which had sold the much required dollars to these importers, hedged their positions using buy/sell swaps—a contract used to buy the dollar now and sell it later. This, in turn, had brought down the one-year forward premium to levels unseen since January 2012. Over the last few days, however, the premiums have started to normalise. On Friday, it recovered to 256 paise—a 13.50 paise recovery from the lows of 242.50 paise seen on February 28. Anindya Banerjee, DVP at Kotak Securities, points out that the normalisation of forward premia could be an indication that the stress in the trade finance market is abating. “The acute dollar shortage seen in the spot market earlier has normalised as of now. Some of our clients have indicated that things are getting better, in the sense that banks have started to ease a bit on the trade finance side.
As a result, the normalisation of forward premia is causing the rupee forward levels to drop. We expect the forward premia to go back to 280 levels in a couple of weeks,” he said. Ananth Narayan, professor-finance at SPJIMR, observed that although the system was short and scrambling for greenbacks a few days earlier, short-term dollars are available again. “The one-day forward premia indicates a surplus of dollars. While this could indicate an easing of the trade finance issue, this could also be as a short-term phenomenon as a result of specific QIP/ capital inflows,” he said. Narayan also cautioned that it would be too early to consider that the scramble for dollars is over. “Some forward USD purchase contracts of RBI would be maturing at the end of the month, perhaps worth as much as $3 billion. If RBI takes delivery of that size rather than rolling it over, that could bring about a scramble for USD all over again,” he said. On Friday, the rupee ended the session two paise down taking it to a one-week low of 65.1675 against the dollar. Although the dollar has not shown any considerable strength this year, the rupee has been an under-performer compared to its emerging market peers, with the currency delivering a negative return of 1.98% since the beginning of the year. “Rupee is currently among one of the worst performing currencies in the emerging market. We believe the rupee might remain in the range of 64.70-65.50 in the near term,” Banerjee said.