By Nimesh Vora
MUMBAI, – The dollar/rupee forward premiums dropped on Tuesday, extending their losses, as the Indian central bank conducted buy/sell swaps alongside spot interventions to prevent the local currency from sliding more than it already has, four traders said.
The Reserve Bank of India is selling dollars in spot and “heavily” conducting buy/sell swaps in mid-tenor forwards, a forex swap trader at a bank said.
The central bank is doing buy/sell swaps in spot over March, April, May and November, he said.
The rupee has dropped to lifetime lows the last two days — including to 84.7575 per U.S. dollar on Tuesday — prompting the RBI to sell in spot and buy/sell swaps to help the currency. Previously, the RBI’s intervention has been limited to spot.
Since buy/sell dollar/rupee swap offsets dollars sold in spot, the RBI’s dual market intervention prevents its spot market activity from impacting liquidity.
India’s banking system liquidity surplus has dropped to around 900 billion rupees ($10.62 billion) from nearly 3 trillion rupees in early October.
Moreover, the RBI’s swap activity does not impact headline forex reserves.
The dollar/rupee November forward premium dropped six paisa to 1.66 rupees, adding to the 10 paisa decline on Monday and shrinking the 1-year implied yield on the pair to below 2% for the first time since the first week of August.
“After a long time we are seeing the RBI in action in the forward market,” a senior currency trader at a private bank said.
“All through today and yesterday, the RBI has been on offer (on spot) and receiving (doing buy/sell swaps).”
The downside pressure on premiums has been exacerbated by weak economic growth data and how the market was positioned, he added.
India’s GDP growth slowed much more than expected to a seven-quarter low of 5.4% in the September quarter, prompting bets that the RBI may cut rates sooner than estimated.
The traders declined to be named as they are not authorised to speak to the media. ($1 = 84.7210 Indian rupees) (Reporting by Nimesh Vora; Editing by Savio D’Souza)
