Forward premia point to weakening rupee ahead
The rupee is expected to weaken further in the near term, as strong demand for dollar by importers has pushed up one-month premia in the forward market.
By Preeti R Iyer, TNN |
MUMBAI: The rupee is expected to weaken further in the near term, as strong demand for dollar by importers has pushed up one-month premia in the forward market. However, over the long term, the rupee is expected to stabilise as the premia on a one-year contract has not moved significantly. In a way, there has been a convergence between the near and long-term premia on the forward contracts observed in the previous week.
For the past two months, yields on the one-month and three-month premia mostly remained below 1%. However, in the past week, as the rupee continued to hover around 46.50, yields on the near-term forward contracts rose by almost 20 basis points within five trading days to cross 1.10% levels. On the other hand, the yields on the six-month and one-year contracts have gone up by just approximately 10 basis points in the same period. The local currency breached the 47-mark in the third week of July and has traded in a wide band of 46.50-47 in the past fortnight.
A senior official at Basix Forex and Financial Solutions explained that the annualised premium might stabilise at around 1%. Premiums typically harden in the scenario of a depreciating rupee. Globally, it has been observed that the dollar has been gaining ground against the euro and the yen.
In fact, dollar purchases in the forward market could also push up the rates on the spot markets, he added.According to a senior treasury manager at a public sector bank, through these short-term purchases of the greenback, importers are signalling the view that even though the rupee is not expected to strengthen in the near term, there is a strong likelihood that it could weaken rapidly, generating a drastic impact.
Premiums serve to be a hedge against the volatile behaviour of the rupee. Buyers of foreign currency pay a premium or discount, depending on the view they take on the future course of the currency, in order to hedge the risks associated with the price of the currency.
A view that the rupee will weaken further implies that the buyer will pay a premium to avoid losses on paying higher amount for the currency. Exporters on the other hand, have still chosen to keep a part of their exposures unhedged, as there is no final view on the course that the rupee is expected to take in the near term.
For the past two months, yields on the one-month and three-month premia mostly remained below 1%. However, in the past week, as the rupee continued to hover around 46.50, yields on the near-term forward contracts rose by almost 20 basis points within five trading days to cross 1.10% levels. On the other hand, the yields on the six-month and one-year contracts have gone up by just approximately 10 basis points in the same period. The local currency breached the 47-mark in the third week of July and has traded in a wide band of 46.50-47 in the past fortnight.
A senior official at Basix Forex and Financial Solutions explained that the annualised premium might stabilise at around 1%. Premiums typically harden in the scenario of a depreciating rupee. Globally, it has been observed that the dollar has been gaining ground against the euro and the yen.
In fact, dollar purchases in the forward market could also push up the rates on the spot markets, he added.According to a senior treasury manager at a public sector bank, through these short-term purchases of the greenback, importers are signalling the view that even though the rupee is not expected to strengthen in the near term, there is a strong likelihood that it could weaken rapidly, generating a drastic impact.
Premiums serve to be a hedge against the volatile behaviour of the rupee. Buyers of foreign currency pay a premium or discount, depending on the view they take on the future course of the currency, in order to hedge the risks associated with the price of the currency.
A view that the rupee will weaken further implies that the buyer will pay a premium to avoid losses on paying higher amount for the currency. Exporters on the other hand, have still chosen to keep a part of their exposures unhedged, as there is no final view on the course that the rupee is expected to take in the near term.
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