Liquidity, rising rates to keep forwards firm

Rising interest rates coupled with tight interbank liquidity are expected to keep forward dollar/rupee premiums firm till March-end, currency dealers said. However, a huge spike in premiums is ruled out after the sharp rise seen during the last few days.

"I expect premiums to remain biddish till the call rate is high but the paying will not be much," R. Sivakumar, forex manager, Wipro.

"If the cash rate is high and the interest rate remains firm then the one-year premium may go to about 2.10 per cent."

Monday, the 1-year premium rose to 2.10 per cent from 1.9 per cent Friday as banks bought forward dollars owing to the persistent tight liquidity.

Call rate has been above 6 per cent since mid-December following corporate advance tax outflows and Rs 330 billion outflow towards State Bank of India's Millennium Deposit redemption.

Pressure on the call money rate increased further and the rate rose to 8.00 per cent after the Reserve Bank of India raised the reverse repo and repo rates by 25 basis points each in the 2005-06 (April-March) monetary policy review on January 24.

Near tenure forward premiums have moved up adjusting to the rise in interest rates as liquidity tightness persisted. The one-month premium has gone from 6 paise in early January to around Rs 0.12-0.13 now.

"Before liquidity tightened in December, the forward curve was flat but as soon as the liquidity tightened importers came in to pay," a dealer at a private bank said.

"The market is short on rupees so they are buying forward dollars converting them into rupees," said an official with a petrochemical company.

In the immediate-term, the attention is focussed on the US Federal Open Market Committee meeting due later today, dealers said.

Expectations are that the U.S. Federal Reserve will hike the interest rates by a further 25 basis to 4.50 per cent.

"If the US rate hikes stop, the forward premiums may come off to 1.50-1.75 per cent. On the other hand if the US rate hikes are paused while the local rates remain the same premiums will be between 1.75 and 2.25 per cent. Short term rates will follow the long tenures," the official said.

"If the Fed gives some hawkish statement on interest rates then the one-year premium will touch 2.25 per cent," said a dealer with a state-owned bank, adding that only government spending can improve the liquidity situation.