Anyone who has been monitoring my writings knows that I never make forecasts. In that context, I would like to
present some data I have been watching for some time. The spread between the NDF one-month forward rate and the onshore one-month forward rate often provides some sense of direction of spot US dollar/rupee. This makes sense since there are no constraints (of exposure, etc.) in the off-shore market so investors are free to express their views on the market – thus, when the NDF is weaker than the onshore, it generally points to a weakening of spot, and vice versa.
The correlation of movement in spot and the 5-day average of the NDF/onshore difference since December has been a huge 89%. What I have noticed is that over the past few days, even as the rupee’s weakness has been accelerating, the NDF/onshore spread has been narrowing. As of today (16 April), while spot rupee is at an all-time low of 76.87, the spread is at the lowest level it has been since March 5, when the rupee, which had just started falling, was at 73.31.
