RBI steps up intervention in forwards, rupee weakens on heavy dollar demand

The Indian weakened on Tuesday due to defence-related demand for dollars, even as the Reserve Bank of India (RBI) continued to mop up the greenback coming to the markets related to stake sales.

Currency dealers say nationalised banks were quite active in buying dollars the past few days, and a subsequent jump in forward premium would mean that they are buying spot dollars on behalf of the central bank and selling the dollars in the forwards markets.

The stock indices are also rising, which is helping the central bank accumulating dollars from the market. The central bank is parking these accumulated dollars in the forwards markets, which is improving liquidity for now at the cost of demand of dollar for a future date.

The closed at 74.94 a dollar on Tuesday, down from its previous close of 74.69 a dollar. The 12 months forward premia have surged about 10 paise in the two trading days this week. Such jump in premium happens when the central bank buys dollars in the spot market and sells in the forwards markets.

The 12-month forward premium is roughly at around 3.96 per cent. Admittedly, the premium is still lower than the normal 4-4.5 per cent level that prevails in the market. Sometimes, the premium can jump to six per cent also if there is shortage of dollars anticipated for the futures.

“Importers have picked up hedging, and the has basically helped them keeping premium low. But the hedging demand is also pushing up the premium,” said a senior currency dealer with a foreign bank. “Besides, the has generally become very active in the forwards space in the last few days,” the dealer said.

The low prevailing premium is because of the RBI’s liquidity stance, and could be also intentional. did a couple of buy/sell swaps with banks for three years. The RBI bought spot dollars and gave banks liquidity. From next year, the central bank will have to return the dollars to banks, and technically that means buying from the markets. Theoretically, a soft rate helps the RBI buy dollars at a cheap rate. Though a central bank doesn’t need to go into such length considering the huge foreign exchange reserves it has, more than $500 billion, and which it keeps on accumulating every month.

According to IFA Global, a currency consultant, the central bank did not allow the rupee to appreciate in June as it wanted to close its annual accounts with a high dollar rupee exchange rate, so that it’s local assets are valued high and the central bank can pay more dividend.

“It will be interesting to see how much the RBI allows the Rupee to adjust as the RBI balance sheet date is behind us. It has so far not allowed positioning to build up in any direction and has kept speculators at bay,” IFA Global said, adding there could now be a new normal level for the rupee.

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