The rupee forward premiums curve is inverted as a result of India Cenbank's FX swaps.

India-Rupee/Forward Premiums: The rupee forward premiums curve is inverted as a result of India Cenbank's FX swaps.

Reuters, Mumbai, December 12 The dollar/rupee forward premiums curve has been inverted because to the arbitrage between the offshore and onshore markets and the Reserve Bank of India's currency swaps, which sustain the spiraling rupee without having a direct impact on the system's cash.

For the first time this year, the implied yield on near-maturity forwards is greater than that on longer-term forwards.

The 1-month dollar/rupee forward premium, for example, has an implied yield that is 30 basis points greater than the 1-year, and the 3-month has an implied yield that is 14 basis points higher than the 1-year.

When businesses make judgments about currency hedging, the dollar/rupee forward premiums are a crucial factor. The term of the hedges and, thus, a company's choice to take a hedge may be impacted by a distortion in the premiums curve.

According to Madhavi Arora, head economist at Emkay Global Financial Services, the forward premium curve is being distorted by the RBI's FX swaps.

As the rupee regularly reaches new all-time lows, the central bank has started selling dollars in the spot market to strengthen the currency.

However, the RBI has had to use dollar-rupee swaps, which are effectively selling dollars for a future maturity, to offset the depletion of rupee liquidity caused by that intervention. This has left rupee liquidity and FX reserves unaltered.

As the rupee fell to a record low of 84.88 versus the US dollar on Thursday, the central bank also took action using both strategies.

However, those forwards have been pushed down by the RBI's buy/sell swaps in mid- to longer maturities. For the first time in four months, the 1-year expected yield fell below 2% last week.

However, bankers claim that the arbitrage opportunities between the onshore and non-deliverable forward (NDF) markets are primarily responsible for the recent spike in rates on near maturities.

The negative prognosis for the rupee has caused the NDF dollar/rupee rates to rise, which has resulted in the arbitrage.

Banks must purchase dollars in the onshore forward market in order to take advantage of the arbitrage, which is mostly in the 1-month, which raises premiums in that tenor.