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Near-term forward premiums in India surged on Tuesday with the one-month dollar/rupee premium trading at its highest level in more than two decades as massive dollar inflows towards an initial public offering skewed prices.
Traders said the unexpected surge in forward premiums has made the spot market highly illiquid
Near-term forward premiums in India surged on Tuesday with the one-month dollar/rupee premium trading at its highest level in more than two decades as massive dollar inflows towards an initial public offering skewed prices. The partially convertible rupee was trading largely steady at 73.91/92 per dollar at 0830 GMT compared to its close of 73.9150 on Monday after earlier rising to 73.7725 levels. As long as the carry is at such elevated levels, no one will go long dollar, the head of foreign exchange trading at a private bank said.
In a sign that the Reserve Bank of India’s (RBI’s) loose monetary policy could be leading to unintended consequences, the rupee nosedived 1.52 per cent after the central bank committed to buying Rs 1 trillion bonds from the secondary markets in the first quarter.
The rupee closed at 74.56 to a dollar the lowest since November 13, 2020. The intraday fall is the steepest since the August 2019 levels.
According to Paresh Nayar, head of forex and fixed income at First Rand Bank, there was sustained dollar demand since Tuesday, which increased on Wednesday.
That may have triggered some stop-loss positions, leading to a sell-off in both offshore and onshore markets. Seeing the rupee fall sharply, foreign investors who had not hedged their exposure may have had to cut their position, further exacerbating the situation. Currency dealers also say Wednesday’s simultaneous movement in both offshore and onshore markets indicates massive unwinding in the carry positions.