Indian rupee FX premiums jump after RBI policy leaves traders bracing for more sell/buy swaps

The dollar-rupee forward premiums soared on Wednesday, with traders bracing for more sell/buy FX swaps by the Reserve Bank of India after the central bank announced no new liquidity-withdrawal measures at its policy meeting.

The implied 1-year dollar/rupee forward premium climbed 20 basis points to 3.66%, its highest in six months.

The 1-year had already jumped 14 bps on Tuesday amid likely sell/buy swaps by RBI.


The sell/buy swaps have been part of RBI liquidity-management operations, making them a key instrument for draining the rupee liquidity created by its dollar mobilisation schemes.

RBI chief Sanjay Malhotra had last month pointed to FX swaps among the tools available to manage surplus liquidity. In Wednesday's policy, Malhotra said the RBI would use an "appropriate" mix of liquidity management tools.

The central bank did not announce a CRR hike or other fresh liquidity-absorption measure.

That has reinforced expectations among currency traders that the RBI will continue using sell/buy swaps to manage the liquidity overhang.

"The moment that the policy had no new liquidity measure in the policy, traders started positioning for more sell/buy swaps," a currency trader at a private sector bank said.

Forward premium up move is being amplified by the rise in USD/INR spot, bankers said.

Spot USD/INR up 0.28% at 96.70, within striking distance of its all-time high of 96.96