The 1-year USD/INR forward implied yield – a measure of the US and India interest rate differentials – has dropped to near 2.80% from around 4.6% since January.
This has led to a decline in the rate at which dollars can be bought or sold for delivery at a later date, known as the forward outright rate. The outright is derived from spot and forward premiums.
Gautam Kumar, head of financial products at Kristal.AI at Singapore-based digital private wealth management platform, said that for importers and exporters, the outright rate was far more critical than the spot rate.
“Any time the outright rate for one, two or three months falls below 80, importers will step in and buy dollars.”
Importers are looking to hedge their currency risks, as expectation of aggressive US Federal Reserve rate hikes, lifts Treasury yields and the dollar.
“The fall in premiums reduces the cost of hedging,” said Arindam Sandilya, head of emerging Asia local markets strategy at JP Morgan.
Sandilya pointed out that a fall in premiums was happening while the Reserve Bank of India was looking to alleviate depreciation pressure on the rupee.
The decline in premiums, therefore, “is somewhat undermining” RBI’s efforts to support the rupee, a trader at a private sector bank said.
Madhavi Arora, lead economist at Emkay Global Financial Services, said, “when the premiums fall, importers tend to hedge more”.
“If it continues for too long, it tends to become a bit self-fulfilling for the currency.”
The rupee was trading at 79.81 per US dollar, not too far from its record low of 80.12 reached late last month.
For all the latest Sports News Click Here