Rupee: Forwards premium on Rupee-Dollar soars up to 360 bps – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/forex/forwards-premium-on-soars-up-to-360-bps/articleshow/82378740.cms

Synopsis–The cost of covering unhedged currency risks in the derivative markets surged on Monday, potentially affecting companies with large import bills, with the one-month onshore forwards premium on the rupee-dollar pair spiking up to 360 basis points through the trading session.

MUMBAI: The cost of covering unhedged currency risks in the derivative markets surged on Monday, potentially affecting companies with large import bills, with the one-month onshore forwards premium on the rupee-dollar pair spiking up to 360 basis points through the trading session.

The unusual movement is attributed to several factors: Inbound dollar flows for the PowerGrid initial offer, a legal tussle between the government and Cairn Energy over arbitration payments, and likely regulatory intervention in the currency markets.

“Surplus dollar liquidity triggered a surge in the forwards premium,” said Ashhish Vaidya, treasury head at DBS Bank. “The market has probably witnessed unwinding of some of the arbitrage trades, which in turn are adding to domestic dollar liquidity.”

Rupee Level may be Affected
The rupee’s level could be affected when the premiums contract. “Whenever the elevated levels normalise, it will likely weigh on the rupee’s spot price action,” Vaidya said.

The rupee gained 0.20 per cent to close at 73.93 to a dollar Monday. It may extend losses up to 75 to a dollar once the forwards premium starts dropping, dealers said.

The premium on a near one-month onshore forwards (maturing on May 20) yielded 9.76 per cent Monday, about 360 basis points higher than Friday’s close, dealers said. Forwards premium soared across maturities (up to 12 months) by a wide range of 80-360 basis points.

Overseas investors poured in funds to subscribe to the initial public offering (IPO) of the PowerGrid InVit that is aiming to raise Rs 5,000 crore.

“A dollar glut had led to arbitrage in the overseas markets, and it may be responsible for the sudden surge in the forward premium onshore,” said Bhaskar Panda, Executive Vice President, HDFC Bank.

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