Dollar-rupee futures premiums declined on Thursday after India’s central bank said it would inject rupees into the banking system daily, which bankers said would reduce the need for buy/sell swaps dollar-rupee.
The Reserve Bank of India said on Wednesday it would conduct variable rate auctions, through which it lends funds to banks, every working day until further notice.
WHY IT IS IMPORTANT
The level of forward premiums is an important factor that companies take into account when managing their foreign exchange risks. The level of near-term premiums influences the behavior of speculators when betting on the evolution of the dollar/rupee pair.
CONTEXT
The RBI carried out buy/sell swaps on the futures market in order to cancel out the impact of its regular dollar sales interventions on national liquidity.
With the central bank now injecting rupee liquidity, the volume of call/sell swaps it needs to make to manage liquidity will decrease, leading to lower premiums.
MARKET REACTION
The one-year dollar-rupee implied yield fell 3 basis points to a two-week low of 2.40% on Thursday, while the one-month forward premium fell to 21 paisa, compared to 23 paisa in the previous session.
Rupee liquidity in the country’s banking system remained at a deficit of 2.2 trillion rupees ($25.43 billion) on January 15, after reaching a more than 7-month high of 2.5 trillion rupees on Monday.
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Repo auctions will help reduce the overnight dollar-rupee swap rate, which will impact the forward premium curve, said a senior trader at a state-run bank.
($1 = 86.4950 Indian rupees)
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