Rupee Forward Premiums Fall Before Likely Delivery Of RBI's $5-Billion Forex Swap
The RBI has done a sell/buy swap of $5 billion in March 2022 for a period of two years and it matured on Monday.
Premiums on dollar/rupee forward contracts across tenures came under pressure in February on heavy dollar sales before the Reserve Bank of India has likely taken delivery of the $5 billion sell/buy forward swaps, according to forex traders.
Premiums on one-year dollar/rupee forward contracts declined 17 basis points from Feb. 1 to March 8 as banks continuously sold the greenback for forward delivery on anticipating short-term dollar crunch in the system.
During the same period, premiums on six-month dollar/rupee and three-month forward contracts fell 23 bps and 40 bps respectively, according to data on Cogencis.
There was no notification from the RBI last week to roll over the swap, an indication that it will take the delivery on Monday. Tight liquidity conditions and sustained dollar inflows may have prompted the central bank to take the delivery of the swap, according to VRC Reddy, head of treasury at Karur Vysya Bank Ltd.
"Market has already positioned itself for delivery of the swap and priced it in the last two weeks, that's why forward premiums eased. As the event is over, today (Monday), the forward premiums bounced back from the lows," Reddy said.
Rupee Forward Premiums' Closing Levels As Of Monday
On an annualised basis, the premium on one-year dollar/rupee forward contract settled at 1.72% on Monday, compared to 1.67% on Friday.
On an annualised basis, premiums on six-month dollar/rupee forward contract was at 1.39%, against Friday's close of 1.33%.
On an annualised basis, premiums on three-month dollar/rupee forward contract settled at 1.20% on Monday, compared to 1.13% on Friday.
The RBI has done a sell/buy swap of $5 billion in March 2022 for a period of two years. The swap matured on Monday. The regulator has likely bought back $5 billion dollars as present conditions makes the case for it so, according to forex traders.
In a sell/buy swap, an entity sells a currency in the market in exchange for buying the equal amount of the other pair currency once the swap expires.
Taking delivery will serve two purposes. India’s foreign exchange reserve will go up by $5 billion and rupee liquidity will increase in the market ahead of the government's advance tax outflows, according to Anil Bhansali, executive director of Finrex Treasury Advisors LLP.
Robust greenback inflows in dollar/rupee spot market ahead of India's inclusion to the JP Morgan's Government Bond Index-Emerging Markets eased the worry about potential dollar shortages weighing on the Indian currency.
So far this year, foreign portfolio investors have pumped in Rs 49,955 crore into the country's debt market, according to data on National Securities Depository Ltd.
The inflows are likely to continue, making it easier for the RBI to take delivery to replenish its foreign exchange reserve. India's foreign exchange reserve rose to $625.6 billion in the week ended March 1, up $8.9 billion from Jan. 26, according to data on Cogencis.
As far as the liquidity is concerned, forex traders said the delivery would result in a Rs 40,000-crore liquidity in the banking system, which will help easing anticipated liquidity deficit by the end of the financial year.
"Of late what happened, the news was (that the) government did some spending (and) as result of this, the liquidity has come into slightly surplus mode," Ritesh Bhansali, director at Mecklai Financial Services Ltd., said.
"Again, there's Rs 2 lakh crore of advance tax outflows and liabilities. By the end of the last week of March, you will again see liquidity getting into deficit mode," Bhansali said.
As of March 10, the liquidity in the banking system was in a deficit of Rs 28,926.3 crore, according to data on the RBI's website.
Premiums on long-term dollar/rupee forward contracts are expected to correct as the event has passed and U.S. Treasury yields cool down, which has already seen in Monday's session.
The yield on the benchmark 10-year U.S. Treasury yield reversed its upward trend once Fed Chair Jerome Powell said in its testimony that current rates are at peak and indicated rate cuts would happen this year.
It extended losses to fall to a one-month low of 4.09% on March 7, restricting decline in the forward premiums. Forward premiums of a currency pair are reflective of the interest rate differential between the two countries.
The market is looking forward to the release of the U.S. consumer-price-index data on Tuesday, which will provide further clarity on the Fed's rate trajectory in the near term and reveal what's in the store for the Indian rupee.
