Re concerns push forward premia on $

MUMBAI: Corporates are betting on a weaker rupee in the near future. This is reflected in the premium on dollars in the forward market, which has gone up to 3.50% on Friday from last week’s closing level of 2.15%.

Treasury managers state that with the year-end round the corner, most corporates are seen unwinding positions, while importers have also been covering positions. There are also fears about repatriation of dollars later this month, which could further weaken the rupee.

Traders are expecting the rupee to weaken because the dollar is gaining against other currencies after data released in the US showed improved economic indicators. This has prompted expectations that the Federal Reserve may cut rates at its next meeting. The forward premium on dollar is directly linked to the London inter-bank offered rate (Libor) and the dollar-rupee exchange rate in the spot market.

A severe strain on liquidity conditions has raised inter-bank rates by nearly 200 basis points in the past week. Call rates on Friday touched an intra-day high of 8.25% compared with 6.20% levels recorded a week ago.

According to a dealer at a private sector bank, the yield payable on the one-month contract could rise up to the 4% levels by the end of this month, while that on the one-year premium may hover around the current levels. Subsequently, the yield on the six-month premium has risen to nearly 3% compared with 2.10% a fortnight ago, while that on the one-year premium has shot up to 2.52% from less than 2% over a similar duration.

Tracking a dip in the stock market indices earlier this week, the rupee, too, weakened to the 44.84 levels against the dollar. On Friday, the local currency ended at 44.70 per dollar. Surplus funds absorbed by the central bank have fallen to less than Rs 3,000 crore from around Rs 25,000 crore in the first week of December. Consequently, RBI has pumped in more than Rs 20,000 crore through repo operations in the same period.

In the government bond markets, yields rose as a reaction to the sudden hike in the cash reserve ratio announced by the central bank after market closing hours on Friday last week. However, since the RBI announcement, the yield on the benchmark 7.59% 2016 bond has risen by 25 bps to the 7.64% levels from 7.38% earlier this month.

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.