India cenbank-spurred drop in premiums not helping rupee's cause, analysts say
By Nimesh Vora
MUMBAI, Dec 4 (Reuters) -A plunge in rupee premiums, triggered by the Reserve Bank of India selling dollars in the onshore forward market, has added to the central bank's challenges in curbing further weakness in the currency, analysts said on Wednesday.
The implied yield on the 3-month, 6-month and 1-year dollar/rupee forward premiums dropped between 16 and 22 basis points this week. The 1-year yield declined below 2% for the first time in four months.
The RBI has returned to the forward market after a long time, the traders said, adding that the latest form of intervention is a double-edged sword.
Selling dollars in the forward market allows the RBI to deliver dollars at a future date. This helps the central bank not deplete the forex reserves or hurt the rupee's liquidity.
On the flip side, a large decline in premiums makes it cheaper for importers to hedge their future foreign obligations, increasing demand for the dollar. Also, it is a disincentive for exporters and carry traders to hedge, especially when the rupee's outlook is shaky.
"There is always a fallout to any form of intervention and the same is with forwards. The drop in premiums due to forwards intervention means, to an extent, the RBI will need them to work more (in keeping the rupee from falling further)" Sakshi Gupta, principal economist at HDFC Bank, said.
Intervention in the forwards market has followed heavy dollar sales in the spot market and the offshore non-deliverable forwards market to slow the rupee's decline, traders said.
The local currency has been under pressure on account of the weakness in Asian peers and outflows from Indian equity and debt in October and November.
The rupee was at 84.70 at 1:10 pm IST, after dropping to an all-time low of 84.7575 on Tuesday.
Amid the portfolio outflows, India's forex reserves have fallen to a 5-month low. Liquidity, meanwhile, moved into deficit late last month.
"The RBI (via intervention in forwards) is managing their other objectives of managing reserves and liquidity apart from that they want to shore up the rupee," Madan Sabnavis, chief economist at Bank of Baroda, said.
Reporting by Nimesh Vora; Editing by Janane Venkatraman
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