Spot Re Slips, Forwards Look Up

Panic about the downgrading of India's foreign currency issuer rating by Standard & Poor (S&P) and restoration of the limits for the exchange earners' foreign currency (EEFC) accounts resulted in the spot rupee's slip to 46.35 yesterday.

The currency closed lower at a 46.26-46.27 against the dollar compared with Tuesday's closing of 46.18.

Forward premiums rose on account of high call rates supplemented by the rejection of repo bids by the Reserve Bank of India (RBI). The six-month annualised premiums closed around 4.6 per cent.

The spot rupee opened at an intra-day high of 46.23 per dollar. There was nervousness in the market on account of the revised outlook by S&P.

Macro issues like inflation, decline in the growth of gross domestic product (GDP), oil prices, the country's deficit etc discussed by the credit policy added to the negative sentiment in the market to make the spot touch an intra-day low of 46.35. Corporate and exporter cancellations put pressure on the supply of dollars.

"The restoration of EEFC facility to exporters is unfavourable news for the rupee. Sellers withheld their transactions in anticipation of the rupee to fall further. The spot touched an intra-day low before noon on account of the panic caused by the rating," said a dealer with a public sector bank.

"The market took an aversion to the downgrade. We expect the rupee to be weak today and be traded in the 46.20-46.35 range," said a dealer.

Forward premiums opened high and traded in a five-paise range throughout the day. Forwards recovered slightly before closing but still closed higher. The one-year annualised forward premium closed around 4.4 per cent.

Dealers expect premiums to stay firm tomorrow and are of the opinion that forward contracts will not recover immediately.

"The rejection of repo bids by the central bank clubbed with higher call rates and a falling rupee led the forward premiums to rise," said a forex dealer.