Strong demand for US dollars in the non-deliverable futures (NDF) market has widened arbitrage with the Indian onshore market, putting further pressure on the rupee and pushing it close to a new record low, traders said Thursday.
The rupee fell to 85.7900 per US dollar, not far from the all-time low of 85.8075 reached last Friday. It opened on a weaker note, at 85.7025, and has been under pressure since.
The rupee steadily hit record lows in December, driven by the rise in the Dollar Index and US Treasuries. India’s falling growth rate, rising trade deficit and slowing capital inflows have compounded its woes.
In this context, speculators flocked to the dollar in the NDF market against the rupee, which created arbitrage opportunities with onshore over-the-counter (OTC) markets.
For example, the one-month dollar/rupee NDF rate on Thursday was 4-6 paisa higher than the onshore OTC rate, according to traders.
“It’s not just the one-month rate, there is a good arbitrage between maturities,” said the head of foreign exchange and rates at a private sector bank, while stressing that the difference between both rates had widened on Thursday.
-“With the start of the new year, it looks like new money is going to work (in the NDF market).
To exploit arbitrage, market participants buy dollar/rupee in the onshore OTC market – which increases the value of the pair in that market – and sell it in the NDF market.
“Barring a major change in the dollar’s outlook, one should not expect the NDFs to ease and the rupee to work, said a forex trader at a bank.
The Dollar Index, hovering at its highest level in more than two years, is currently well supported by expectations that US President Donald Trump will raise trade tariffs.
