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Premiums on dollar/rupee forwards fall as RBI replenishes FX reserves

Informist, Thursday, Jun 23, 2022


By Srijonee Bhattacharjee 


MUMBAI – To prop up its foreign exchange reserves, the Reserve Bank of India has been taking delivery of outstanding long forward dollar bets in advance, dealers said.

This has led to a sharp fall in premiums, with the one-year contract sliding to below 3% for the first time in 11 years on Wednesday and staying there for most of today.


On an annualised basis, premium on the one-year dollar/rupee fell to as low as 2.78% on Wednesday while in paise terms it touched a low of 219.15 paise. Today, the premium recovered slightly to 235.50 paise as against 220.54 paise at close on Wednesday and 3.00% from 2.80% at previous close. 


Dealers said the central bank has been executing buy-sell swaps for the past few days, where it buys dollars immediately and sells them for delivery in June, July, October, and November. 


Given that the central bank had been expending its dollar reserves to limit the fall in the rupee, it may want to compensate on the optics by taking delivery of its outstanding $64-bln forwards book, dealers said. 


“The behaviour in the forward market has been triggered by a distinct absence of paying by the RBI in the far end rollovers towards higher maturities) and instead an increase in receiving interest by the central bank (through aggressive B/S swaps),” Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank said in a note.


As per data from the central bank, it has spent a net of nearly $11 bln so far this financial year, while in Jan-Mar the net drawdown was of $16 bln on a balance of payments basis. 


As the rupee continues its downward spiral, for eight straight weeks now, the central bank may not be absolved of its duty to sell dollars from its coffers to keep the Indian unit’s fall gradual. This is why it is taking delivery of its outstanding long forward dollars positions, dealers said. 


Dealers said that the RBI was also selling dollars for forward delivery to neutralise the impact of greenback sales in the spot market on liquidity. 


Sales of forward dollars by the RBI triggered stop losses of other participants, prompting them to unwind long bets on forward dollars, thus, pushing premiums even lower.


Dealers said the pressure on premiums was also due to a growing dollar shortage in the market. High prices of dollars offshore prompted market participants to convert rupees for dollars immediately and then selling the US unit for delivery the next day, bringing rates on very near-term swap points lower, dealers said.  


Today, the discomfort on dollar availability has improved from Wednesday, dealers noted.


“While one can attribute multiple reasons, ranging from narrowing interest rate differential to RBI intervention to liquidation of long forward position, for such a sharp compression in forward points, but one cannot overlook the fact that importers and FPIs need actual dollar in cash/spot and if same is not available, either RBI needs to sell dollar from its reserves, or banks need to generate dollars through buy-sell swap, thus putting more pressure on forward points,” Vikas Bajaj, head – Currency Derivatives & IRF at Kotak Securities, said in a note.


Had the central bank not been selling dollars for forward delivery to neutralise the impact of their dollars sales in spot market on liquidity, the crunch in dollar availability may have eased, dealers noted.  End


US$1 = 78.30 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT


Edited by Aditya Sakorkar


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Source: Cogencis

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