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The Indian rupee opened 35 paise higher at 94.71 against the US dollar on Friday (October 16), compared with Thursday’s (October 15's) closing level of 95.06, as traders unwound bearish bets on the domestic currency and expectations of continued dollar selling by the Reserve Bank of India (RBI) lent support. The rupee’s gains come even as other Asian currencies weakened and the dollar index edged higher, indicating that the domestic currency has been charting a different course amid a series of RBI measures aimed at curbing dollar demand and supporting the rupee. A currency trader at a foreign bank said there had been a “fair amount” of unwinding of long USD/INR positions this week.
The development has supported the rupee in the offshore non-deliverable forward (NDF) market, the trader said, adding that the RBI’s determination to push the rupee higher could encourage further cuts in long-dollar positions. What is supporting the rupee? The RBI’s recent measures to curb dollar demand have been a key factor behind the rupee’s movement this week.
These include a reserve requirement for certain large foreign-exchange transactions involving forward dollar purchases. The measures prompted significant activity in the foreign-exchange forward market, with uncertainty over which transactions were covered by the requirement leading to confusion among bankers. Several banks reportedly held back from quoting prices to other banks, reducing liquidity and amplifying price movements.
The RBI issued clarifications after market hours on Thursday to address concerns over the measures. A senior treasury official at a bank said the clarifications would help, although some ambiguities remained. Why are offshore rupee rates important?
The dollar/rupee rate in the offshore NDF market is trading at a discount to its onshore counterpart, a relatively unusual development, particularly given the challenging outlook for the rupee. An NDF is a currency derivative settled in cash rather than through the physical delivery of the currencies involved. Offshore NDF rates reflect market expectations and positioning outside India and can offer an indication of how traders view the rupee.
When the offshore dollar/rupee rate is lower than the onshore rate, it indicates that the dollar is trading at a discount offshore relative to the domestic market. In the current context, the difference is consistent with the unwinding of bullish dollar positions, although it does not guarantee further rupee appreciation. What happens next?
Rupee forward premiums have risen sharply this week amid tighter liquidity and banks reducing positions. The RBI’s clarifications could help ease some of the resulting disruptions in the forward market. However, some uncertainty remains over the interpretation of the central bank’s measures.
The rupee’s near-term trajectory will depend partly on how market participants adjust their positions, the extent of any further RBI dollar sales and broader movements in the dollar and other Asian currencies. -With Reuters inputs Tags
Source: CNBC TV18
