MUMBAI (Reuters) – Societe General expects the spread between the USD/INR onshore and offshore rates to shrink from the current two-and-a-half-year highs and recommends fading any rally in the 12-month basis points difference hereon.
The 12-month USD/INR non-deliverable forward (NDF), or offshore, rate is about 80 paisa higher than the onshore rate, the highest since May, 2020. The 80-paisa is the basis between offshore and onshore points.
The wide difference possibly reflects offshore participants’ bearish stance on the rupee, SocGen said in a note late on Thursday
Since slipping below the 80-per-dollar level about a month back, the rupee has declined swiftly to hit a record low of 83.20 on Thursday. This despite the Reserve Bank of India’s intervention to prop up the rupee.
Another reason for the widening spread was likely the RBI’s recent directive asking banks to not build fresh positions in the NDF market, SocGen said.
“With the recent reversal in the RBI directions to onshore banks, the spread has increased significantly,” the bank said.
In fact, SocGen pointed out that the 12-month NDF points are the furthest away from onshore points on a z-score basis, which is an indicator of how much the spread differs relative to its standard deviation.
SocGen said the dovish interpretation of the minutes of the RBI’s most recent rate-setting meeting could drive the short-term yield differential between U.S. and India even lower.
This, it said, would “provide tactical opportunities to sell INR FX points in NDF.”
(Reporting by Nimesh Vora; Editing by Savio D’Souza)
