Record onshore premiums hint at more pain for rupee
“Due to limited market participation and absence of arbitrageurs, the distortion in exchange and implied OTC prices is abnormally high,” Prasanna said.
Under normal circumstances, local banks rush to tap the arbitrage opportunities from such high differentials.
Mumbai: Onshore derivative contracts on the rupee are quoting at record premiums after the currency hit unprecedented lows last week, although volumes remain thin due to the Covid-19-induced lockdown across the country.
The one-month forwards and exchange-traded futures (ETF) contracts are fetching premiums in the range of 50-100 paise over spot exchange rates, with analysts not ruling out further weakness in the local unit.
“The offshore pressure is partially transmitted into the onshore market as evidenced from the abnormally high premiums, and the continued pressure on the forwards curve in spite of benign systematic rupee liquidity and monetary easing by the central bank,” said B Prasanna, group head of global markets at ICICI Bank.
The rupee hit a new low of 76.32 a dollar on March 24. Globally, investors sought the safety of dollar-backed assets. The currency closed at 74.85 Friday, up 0.4%.
“Due to limited market participation and absence of arbitrageurs, the distortion in exchange and implied OTC prices is abnormally high,” Prasanna said.
Under normal circumstances, local banks rush to tap the arbitrage opportunities from such high differentials.
