RBI's rupee boost to spur rally, trigger swings in forward premiums

The Indian rupee is expected to strengthen by around 1% to trade between 95.60 and 95.90 per dollar, following the Reserve Bank of India's (RBI) recent measures to curb dollar demand, according to traders. The RBI's actions include prohibiting the rebooking of cancelled rupee-linked foreign exchange derivative contracts, reducing the threshold for transactions without underlying exposure, and mandating banks to set aside 20% cash against specific FX contracts.

These changes are anticipated to increase the cost of hedging against rupee weakness for banks and their clients, thereby potentially limiting corporate demand for dollars. Furthermore, the RBI has established a separate window for oil marketing companies to directly purchase dollars from the central bank, diverting their purchases from the regular market.

While this move targets dollar demand from importers, it may also impact forward premiums by altering the channels through which dollars are purchased.