RBI swaps slow rupee fall, hike premiums

Mumbai: The Reserve Bank of India's sell-buy swaps have managed to slow the rupee's decline, but have also led to a significant rise in forward premiums. This has made it more expensive for overseas investors to hedge their currency exposure, potentially discouraging some debt and portfolio inflows, stated Kunal Sodhani, head of treasury at Shinhan Bank India.

The one-year dollar-rupee forward premium has risen from 7.40% to 8.65%, though it has since dipped slightly to 8.45%. The RBI may have shifted its focus to the forward market to address the rising premium, which could further impact the rupee's value. High premiums might encourage exporters to sell dollars forward, while making hedging more expensive for importers and borrowers.

For large Indian companies, borrowing from the local market in rupees and swapping to dollars for overseas use may be a more cost-effective solution due to the current high premiums. The rupee remains close to its all-time low of 96.96 against the dollar.