Indian Rupee: RBI FX steps support INR but raise hedging costs – MUFG
MUFG’s Michael Wan explains that recent RBI FX measures have supported spot Indian Rupee, while temporarily disrupting derivatives liquidity. Offshore INR forward premiums fell sharply after restrictions on non-resident NDF access and higher hedge costs. These actions reduced speculative Dollar demand and helped INR rally, though at the expense of wider bid-ask spreads and less liquid onshore…
Recent RBI FX measures have supported the spot Indian Rupee (INR) by reaching the 95.2 level, but have also increased hedging costs, according to MUFG's Michael Wan. The actions include restrictions on non-resident Non-Deliverable Forwards (NDF) access and higher hedge costs, which led to a sharp decline in offshore INR forward premiums.
This move reduced speculative Dollar demand and helped INR rally, although it resulted in wider bid-ask spreads and less liquid onshore forwards. While the RBI confirmed that the 20% cash-margin requirement covered interbank trades, the temporary withdrawal of USD/INR forward quotes due to uncertainty added to market concerns. The uncertainty over hedge costs and potential widening bid-ask spreads could lead to cautious market-making, further widening spreads and shifting activity offshore.
Market participants noted that offshore INR forward premiums fell sharply across all tenors between October 12 and 13, suggesting a rapid unwinding of offshore demand for INR downside protection after the RBI's measures. The overall effect of these actions was a rally in INR, albeit at the expense of higher hedging expenses and less liquid onshore forward markets.
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