By Jaspreet Kalra and Nimesh Vora
MUMBAI (Reuters) – A three-month rally in dollar-rupee forward premiums is expected to push on amid wagers of another outsized rate cut in the United States while India’s central bank moves cautiously on monetary easing, six bankers said.
The dollar/rupee 1-year implied yield rose for the sixth straight session on Monday to hit 2.38%, the highest in nearly one-and-a-half years.
The 1-year implied yield has jumped nearly 75 basis points over the last three months, as investors priced in faster and deeper U.S. rate cuts.
Forward premiums reflect the interest rate differential between the United States and India and are therefore impacted by expectations for the future path of the interest rates in the two economies.
Higher premiums, which reflect a widening of the gap between the interest rates, make hedging of FX risks costlier for importers.
The gap between U.S. and Indian rates is expected to rise as the Federal Reserve could opt for quicker monetary easing to protect a softening labour market, while the Reserve Bank of India stays focused on keeping inflation contained.
Fed policymakers surprised most economists last week when they kicked off the rate cut cycle with a 50-basis-point reduction. The probability of a similar rate cut in November has risen to 50%, according to the CME FedWatch tool.
Given the heightened odds, the risks are in favour of dollar/rupee forward premiums maintaining their uptrend, six FX spot and swap traders at different banks said.
The market is likely to stay interested in entering sell/buy swaps or to “pay” in the forward market, Apurva Swarup, vice president at Shinhan Bank India, said. He expects the 1-year implied yield to climb to 2.60%.
The 1-year U.S. and India interest rate differential, based on overnight indexed swaps, was at 2.62% compared to 2.38% reflected in forward premiums, suggesting room for an upside in the premiums.
(Reporting by Jaspreet Kalra and Nimesh Vora; Editing by Mrigank Dhaniwala)
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