Three- and six-month forward premia on rupee went up sharply today following heavy pressure on rupee from dollar selling by exporters and conversion of dollar to rupee to be invested in short-term money market instruments by the foreign institutional investors (FIIs).
The three-month forward premium (annualised) went up by 23 basis points (bps) and six-month by 25 bps to 3.31 per cent and 2.70 per cent, respectively.
According to dealers, as a fallout of the 25 bps cut in the Fed rate, the rate differential between Indian interest rate and that of dollar has further gone up.
On the one hand, the exporters were frantically selling dollars and realising their receivables fearing a further rise in rupee in the coming days as interest rate differentials favour a rise.
On the other, FIIs were busy converting their dollar funds into rupee by taking a short-term forward, putting further pressure on the forward rupee.
These rupee funds are in turn being put in 91-day treasury bills as these are trading at a yield of around 4.95/98 per cent. Including a forward cover and Libor of around 1.03/05 per cent, FIIs have been earning a clean interest of around one per cent.
This spree of conversion of dollar into rupee is putting further pressure on the forward premia which is already on a high.
Dealers said although the forward premia is on a continuous rise, these conversions are putting further pressure on the premia which are continuously increasing. The activity in the short term is also evidenced by the fact that the one-month premia is reeling flat while one-year premia has gone up just by 10 paise.
Dealers said the conversion of dollars into rupee by the FIIs has been going on for over a month now. Earlier, even though the inflows were good, there was matching demand to absorb the flows.
In the current situation, the demand for dollars has almost waned in contrast to rupee funds.
The three- and six-month premia closed at 3.08 per cent and 2.45 per cent respectively yesterday.
In fact , the interbank investments to take advantage of the falling dollar and rising rupee and attractive interest rates on the short-term Indian money market instruments has been going on for quite sometime , thus taking the forward premia further up.
Dealers also feel that although the rise in forward premia has curtailed major arbitrage opportunities, a falling Libor and Indian interest rates being maintained at current levels will encourage these arbitrage deals.
Further, range-bound yields of the instruments in the money and government securities market following measures taken by the RBI for liquidity management will endorse such deals as long as yields do not move down drastically so as to nullify the arbitrage levels.
