As rupee continues to fall overseas investors and importers boost cover

Mumbai: The rupee's slide against the US dollar has led overseas investors and importers to buy covers for their unhedged currency positions, causing de-risking costs to soar amid few signs of an early end to extreme volatility in the foreign-exchange market.

"With the rupee plunging past lifetime lows almost every day lately, no foreign portfolio investor or importer wants to keep unhedged positions," said Anil Bhansali, head of treasury, Finrex Treasury Advisors, a Mumbai-based advisory. "This has triggered the rush for currency covers."

Volatility Expected

The one-month forward premium spiked 95 basis points since last Friday even as the rupee plunged to another lifetime low Wednesday, closing within a touching distance of 82 to a dollar. The three-month and six-month onshore forward premiums yielded 45-35 basis points higher through the three-day period, data compiled by Finrex Treasury showed. One basis point is 0.01%.

The surge in hedging costs accompanied expectations of sustained volatility in exchange rates as the three global reserve-currency proxies - pound, euro and the yen - plunged against the dollar amid unprecedented demand for assets denominated in US money. Since last Friday the one-month USDINR Bloomberg Volatility Index soared 85 basis points to 7.89% Wednesday.

"A high degree of exchange rate volatility is expected in the coming days, prompting companies and institutions to cover their currency risks," said KN Dey, managing partner at Mumbai-based United Financial Consultants. "With US Treasury yields surging and emerging market currencies collapsing, international investors are seeking the safety of only dollar-backed assets."

The US Treasury 10-year benchmark hurdled the 4% barrier for the first time in more than a decade, fanning speculation of sharper rate increases by the US Federal Reserve. However, it pared some of its losses to yield 3.90% Wednesday evening.

The rupee Wednesday plummeted to another new lifetime record of 81.95 a dollar amid concerns of capital outflows. The local unit lost 0.45% closing at 81.94, Bloomberg data compiled by ETIG showed. Foreign portfolio investors net sold Rs 2,772.49 crore of local equities Wednesday, provisional stock-exchange data showed.

Separately, a widening differential between onshore and offshore derivative markets also weighed on onshore forward premiums that soared across maturities up to 12 months.

"The rush for covering currency risk primarily sent the forward premiums higher amid sliding rupee and tightening system liquidity," said Bhaskar Panda, executive vice president, HDFC Bank. “Whenever such an aberration happens, arbitrage opportunities also kick in, putting additional pressure on forward premiums."

Cash in the banking system has slipped into deficit mode over the past one week.

The Reserve Bank of India (RBI) is said to have intervened more in the offshore derivatives market known as non-deliverable forwards. The sum was estimated to be about $1 billion, dealers said.

The RBI could not be reached for its comments.

Overseas investors selling equities or bonds locally hedge in the offshore market as they move the proceeds home.

“Moreover, traders are tapping arbitrage opportunities between the onshore and offshore forwards market, which in turn is pushing near-term premiums higher," Finrex Treasury’s Bhansali said.

The differential between onshore and offshore USDINR forwards rates was in the range of 8-13 basis point in one-month and two-month maturities.

The rupee has lost 9.28% this calendar year, but is ranked the fourth best-performing Asian currency.