Dollar forward rates normalise after carry traders unwind positions

The spike in near-term dollar-rupee forward premium has normalised after carry traders unwound some of their positions and arbitrageurs set in to take advantage of the peculiar rise in cash-spot rates.


The premium for May has fallen to around its normal level of 30-32 paise, from 50-54 paise on Monday. The cash-spot premium, which is used by banks for swaps, had indicated a forward premium rate of 16 per cent.


The rates had also jumped as dollars accumulated in the system following the initial public offering of PowerGrid’s infrastructure investment trust (InvIT). Foreign investors converted their dollars for rupees to invest in the IPO. Most of that dollar has gone back after the IPO closed, say experts, easing the pressure on the system.


According to currency dealers, the Reserve Bank of India’s (RBI) unannounced policy measures on Wednesday put out a signal that the central bank was watching the markets and will take care of the volatility. The central bank was also seen doing some intervention in the markets to ease out the forward rates.


The RBI calmed down the nerves by sending a strong signal in the favour of further flattening of the yield curve, said Amit Pabari, MD and CEO of CR Forex, a currency consultant.


“The relief measures could support the ongoing chaos regarding Covid disruptions in the financial activity and hence volatility in the rupee could be under the RBI’s control,” he said.


The fall in the premium has normalised hedging cost, aiding importers in hedging their near-term exposures.


Currency dealers are also advising exporters to cover a part of their near-term exposure. However, there has been no change in the large exposure framework limitations of local branches of foreign banks.


The rules now say that they cannot repatriate dollars beyond a point from their local operations to their head-office. Therefore, when forward contracts mature, especially at the month-end, there could be issues of dollar excesses and such spikes in overnight or near-term forward contracts cannot be ruled out, dealers say.

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