Indian rupee soothed by intervention, surge in forward premiums tipped to cool

The Indian rupee showed signs of stability on Friday, buoyed by a drop in oil prices and a dip in the dollar following a prolonged rally that had been putting pressure on the currency throughout the week. The central bank intervened to prevent any sharp declines in the value of the rupee. The Indian rupee ended the day at 95.8125 per dollar, a slight improvement from its previous session's close of 95.9550.

Over the past week, the currency remained stable. On Friday, oil prices dropped by approximately 2%, but they remained above $100 per barrel as investors considered the threat of attacks on Saudi Arabia by Houthi fighters against the prospect of a US-Iranian truce and ongoing diplomatic efforts. Despite the rise in energy prices, which have increased global bond yields as investors anticipate central banks raising borrowing costs to tackle inflation, the markets have been cautious about incorporating any optimism into oil prices.

Analysts at ING noted that the markets remain hesitant to embrace any positive outlook into oil prices, thus keeping risks up for interest rates. India's benchmark stock index had its longest weekly decline in six years on Friday, and the Reserve Bank of India's regular interventions have helped keep the rupee's pressure in check.

Additionally, the central bank utilized sell-buy swaps to absorb surplus rupee liquidity from the banking system. The swaps, combined with a lower liquidity level in the forward market and the truncation of outdated positions, led to a sharp increase in dollar-rupee forward premiums this week. The 1-year forward yield surged by up to 28 basis points within three sessions, reaching 3.50% on Friday, its highest level since May.

However, such drastic changes usually subside after market positioning lightens, according to another swap trader at a bank. While this trend may hold true this time, global risk factors could maintain the positioning light for now.