Rupee One-Year Forward Premium Falls Sharply From Over Two-Year High

The premium on rupee's one-year forward contract corrected sharply from over two-year high in last two sessions to Monday, as banks sold the greenback persistently for forward delivery, noting higher premium levels. Moreover, US treasury yields rose sharply which also weighed.

The forward premium on rupee's one-year forward contract was trading 2.55% as of 1:11 p.m. It fell to 2.47% which is the lowest level since Dec. 31. The premium rose to 2.75% on Thursday, touching the highest level since Oct. 13, 2022.

The yield on the benchmark 10-year US treasury note rose to over two-year high of 4.79%, which it hit Friday on the back of strong macroeconomic data. It was trading at 4.79% as of 1:12 p.m.

Forward premium on a currency pair is measured as the difference between interest rates of two countries.

"The RBI did buy/sell swaps on Friday of about $2 billion to ease liquidity position which has brought premiums down to some extent. If RBI continued with it today also, it could provide more liquidity to the markets which are reeling under a deficit of more than Rs 2 lakh crore on liquidity front," said Anil Kumar Bhansali, head, treasury and executive director, Finrex Treasury Advisors LLP.

Meanwhile, some banks purchased the greenback for forward delivery to benefit from the arbitrage opportunity. "A lot of people started doing swaps because NDF (non-deliverable forwards market) was trading at a premium, and onshore was at a discount," said Kunal Sodhani, vice president, Shinhan Bank.

Before the Indian unit crossed the 86-per-dollar level in the onshore market Monday, it depreciated to around 86.12–86.15 a dollar levels in the offshore NDF market on Friday after domestic markets closed.

The rupee has slumped 59 paise to a record low of 86.56 against the US dollar so far on Monday, as the dollar index is hovering around two-year high, and as oil prices surged.