Premiums on the forward dollar crashed by 25-30 basis points today reacting to the Reserve Bank of India (RBI) decision to cap interest rates offered by the banks on repatriable non-resident external (NRE) rupee deposits to 100 basis points over the London interbank bid-offer rate (Libor) from 250 basis points earlier.
While the November-end premium is ruling at a discount, the six-month and one-year rates have come down to close at 0.90 per cent and 1 per cent, respectively, from 1.20 per cent and 1.27 per cent, respectively, on Monday.
Spot rupee also came off during the day from opening highs of 45.83/84 to 45.93 per dollar. Premiums came down as RBI move in lowering in the ceiling on NRE deposits sparked off speculation of a repo rate cut. Forward premiums on dollar reflect the interest rate differential between India and the US.
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Players are of the view that the premiums will continue to go down for some more time as there will be no demand to book dollars forward.
There is a virtual lack of demand to book forward dollars from corporates excepting in the case of month-end import payments.
But the spot rupee is likely to go back to an appreciating mode as it is considered a temporary blip, according to players.
The decline in interest rates will not only affect new deposits under the NRE scheme but is also expected to affect renewals of existing deposits.
But bankers feel that deposit levels may not be affected much as there are not many options for the NRIs to park funds except for the pound sterling bucket, which offers good arbitrage opportunity.
Players, nevertheless, are unanimous in their view that genuine flows will come to India whereas the speculators looking for arbitrage gains might look for other options.
Yet another section feels that with forward premiums expected to go down drastically and Libor still ruling low, there are still arbitrage gains available in converting dollar funds to rupee.