By Nimesh Vora and Jaspreet Kalra
MUMBAI, Dec 19 (Reuters) – U.S. dollar/Indian rupee forward premiums rose to three-year peaks on Friday, spurred by excess dollar liquidity, traders unwinding positions and hedging demand in the non-deliverable forward market, bankers and FX advisors said.
The one-year annualised dollar-rupee premium climbed to 2.84% on Friday, the highest since October 2022 and up over 60 basis points in December so far.
Forward premiums initially jumped this month after the rupee repeatedly slid to record lows, prompting increased hedging and speculative interest.
However, they have continued to climb over the past three sessions despite the currency’s recovery, bankers said, on concerns over excess dollar liquidity, which is reflected in last-day December/first-day January swap points hitting 14 paisa.
On Friday, the rupee climbed to 90 per U.S. dollar, extending a recovery that was spurred largely by the Reserve Bank of India’s intervention. It had slipped to an all-time low of 91.0750 on Tuesday.
UNABATED SURGE
Banks can place dollar deposits to manage excess liquidity, but regulatory constraints inhibit them from doing so at the end of calendar years and quarters, bankers and analysts said.
So banks manage exposure limits around the turn of the year by using dollar-rupee sell/buy swaps, a dynamic that had led to a similar spike in swap points on December 31 last year.
This has impacted most tenors and is leading to heavy paying interest from foreign banks in near-term maturities, bankers said.
Such exposure-related pressures tend to have the greatest impact on very short-dated maturities. The 1-month forward points rose to 40 paisa, highest since March 2022.
A rise in dollar/rupee forward premiums makes hedging more expensive for importers but it also raises the incentive for exporters to hedge future receivables.
“There is a dollar glut as RBI’s (dollar) selling in spot does not seem to have been sterilised to the full extent,” said Abhishek Goenka, CEO at FX advisory firm IFA Global.
Analysts also cited the unwinding of received positions for the higher premiums.
Meanwhile, offshore participants have continued hedging and are betting on further weakness in the rupee, which pushes premiums higher as well.
(Reporting by Nimesh Vora; Editing by Janane Venkatraman)
