Rupee forwards surge on fading RBI cut bets, with thin liquidity magnifying stop losses

The rupee, after slipping through a long-held support at 88.80, has declined rapidly to notch several all-time lows

The Indian rupee's forward premiums jumped to their highest level since January on Thursday, extending their recent rally on the back of crumbling rate cut bets and a slide in the spot rupee that triggered stop losses in a liquidity-starved market.

The implied yield on the 1-year dollar/rupee forward premium climbed 16 basis points to 2.64%, taking the total rise to over 30 bps in three sessions.

Bankers say multiple factors are contributing to the run-up in forward premiums - the slump in the rupee and investors nearly pricing out the likelihood of a rate cut on Friday in light of the currency's depreciation and positioning.

The rupee, after slipping through a long-held support at 88.80, has declined rapidly to notch several all-time lows. On Wednesday, it broke past the psychological 90 level, and on Thursday it weakened further to a lifetime low of 90.40.

The currency's drop has prompted importers to increase hedging, bankers said, adding fresh upward pressure on near-term forward premiums.

Dwindling expectations of a 25-bp rate cut by the Reserve Bank of India and a round of position adjustments have amplified the rise in forward premiums.

The overnight swap market is now implying negligible odds of a cut at Friday's policy meeting - a notable reversal from expectations held before the rupee's slide and India’s robust September-quarter growth data.

Traders said positioning has added to the pressure, with several market participants who had been leaning towards a rate cut, now forced to unwind those bets.

"For far forwards, a large part of the move is position-cutting, and with liquidity running below normal, the moves are being exacerbated," one trader said.