Rupee strengthens to 95.05 a dollar as forward premiums hit four-year high amid RBI measures
The rupee concluded the day on Thursday with a gain of 10 paise, reaching 95.05 against the dollar. This strengthening occurred as forward premiums climbed to levels not seen in more than four years, creating a climate of uncertainty. The Reserve Bank of India took actions that impacted substantial forex derivatives, elevating hedging expenses.
The Indian rupee strengthened to 95.05 against the US dollar on Thursday, while forward premiums reached a four-year high amid the Reserve Bank of India's stringent measures. The one-year forward premium closed at 4.5%, its highest level since January 2022, with some quotes exceeding 10%. The market became illiquid due to the RBI's actions, which forced importers to stay away, according to a treasury head from a private sector lender.
The one-month forward premium surged to 8%, while the six-month rate ended at 6%. Traders noted that the current market situation is irrational, with participants quoting abrupt levels. The RBI imposed a 20% cash reserve requirement on large forex derivatives contracts worth over $2 million. This regulation necessitates banks setting aside funds equivalent to their total exposure when the contract size exceeds $2 million, making one-year hedging costlier by approximately 150 basis points from the usual 3% level.
During the week, the spot rupee gained around 2%, opening at 94.92 against the dollar and reaching a high of 94.85. Dollar demand at lower levels caused the rupee to settle above the 95-mark.
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