RBI intervening frequently in INR forwards
The Reserve Bank of India has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee, possibly to replenish its FX reserves and to replace domestic rupee liquidity, traders said
The Reserve Bank of India (RBI) has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee, possibly to replenish its FX reserves and to replace domestic rupee liquidity, traders said.
That intervention in forwards, coupled with the heavy demand for short-term hedging by importers and foreign investors, has led to a steep inversion of the dollar/rupee forward curves, both offshore and onshore.Also Read - GDP, rupee, inflation, petrol: Is Nifty in for a knockout?The spread between the implied yields on the 1-month and the 1-year rupee onshore forwards has widened from a negative 69 basis points in mid-May to as high as 110 basis points.The spread in the offshore implied forward curve between the one-month and one-year non-deliverable forwards is now a negative 430 basis points, having widened from a negative 110 in mid-May."Spot dollar demand and near-end demand for hedging keeps it elevated while far-ends been depressed due to RBI intervention," one NDF trader said.The "lack of natural hedgers other than FIIs" was also keeping forwards at the longer end depressed, he said, referring to foreign institutional investors.Traders said the Reserve Bank of India had been receiving in the 6-month to ten-month dollar-rupee swaps. The latest data from the RBI shows the outstanding net forward dollar sales as at end of March was USD 3.2 billion, though detail on the tenors is unavailable.That receiving in forwards also helps the RBI augment its intervention firepower.It has been selling dollars aggressively in the spot market to rein in the falling rupee, but the swaps help it defer the impact of that selling on FX reserves to a later date. Reserves stood at USD 291.80 billion as of April.The RBI has also been easing rupee liquidity conditions via bond purchases, both through open market operations and suspected bond purchases in the secondary markets."Intervention is happening at the longer end of the forwards curve. The impact of intervention is the same across tenors but is seen more on the longer end on annualised basis," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.The spot rupee was last trading at 55.38-39 per dollar, weaker than its Thursday's close of 55.65-66. It had hit a life-low of 56.40 on Thursday. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
