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UPDATE 1-INDIA RUPEE-USD/INR forward premiums tumble to over 10-year low

UPDATE 1-INDIA RUPEE-USD/INR forward premiums tumble to over 10-year low

Reuters · 09/14/2022 04:35
UPDATE 1-INDIA RUPEE-USD/INR forward premiums tumble to over 10-year low

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By Nimesh Vora

- The USD/INR forward premiums dropped to their lowest level since 2011 on Wednesday, as expectation of aggressive rate hikes from the U.S. Federal Reserve weighed.

The USD/INR 1-year implied yield INRANPRM1Y=RR dropped to 2.78%, down more than 10 basis points from the previous session. In 2022, the implied yield has declined more than 180 basis points.

"The coming off of the premium is likely to be a temporary thing, is what I would like to believe," said Madan Sabnavis, chief economist at Bank of Baroda, adding that the right level on the 1-year implied was to 4% and "probably higher."

The Reserve Bank of India was "providing a lot of support" to the rupee, which was being reflected in the lower premium, Sabnavis added.

The 1-year yield falling below 2.80% was triggered by an unexpected increase in the August U.S. headline inflation rate that prompted -term U.S. Treasury yields to surge.

Financial markets are pricing in a 75 basis points rate hike by the U.S. Federal Reserve at week's meeting. A few economists projected a 100 bps rate hike and priced in a higher terminal rate.

The Fed has hiked rates by 225 bps this year, as it battles inflation that is running at four times its medium-term target. In 2022, expectations are that the Fed will raise rates by another 175 bps.

The Reserve Bank of India, meanwhile, has raised rates by 140 basis points to 5.40% this year. Some economists reckon that the central bank will raise rates by another 60 bps in 2022.

Apart from the pace of rate hikes, the RBI was running down its forward dollar purchase book to shield the rupee from excessive depreciation, which has kept premiums depressed.

According to the RBI's monthly bulletin, its outstanding dollar forward purchases at the end of June had dropped to around $31 billion from about $66 billion as of end-March.


(Reporting by Nimesh Vora; Editing by Neha Arora)

((.vora@tr.com))