Rise in local bond yields pushes up forward premia

Mumbai: Dollar-rupee forward premium rates, which represent the interest rate differential between the US and India, have jumped over the past week due to hardening domestic bond yields and the Reserve Bank of India’s (RBI) efforts to manage the impact of hefty foreign inflows on liquidity and the local monetary unit that already faces stiff competition regionally in a shrinking global market for exports.

On Monday, the one-year annualised dollar-rupee forward premium rate was at 1.86% as against 1.76% a week ago. A year ago, the premium was at 4.22%. The sharp narrowing of the forward premium rates is owing to the higher quantum of rate hikes carried out by the US Federal Reserve vis-a-vis the tightening conducted by the RBI.

While rising forward premia make it more expensive for importers to hedge, exporters have increased incentive to sell dollars as their returns improve.

“It is primarily a function of two things – the interest rate differential which reflects the recent rise in Indian bond yields and the fact that the RBI has been active in the forwards market to sterilise the liquidity impact of strong inflows. It is better for exporters but at an absolute level, the premiums are still not at very lucrative levels,” said Kotak Securities’ VP for currency derivatives Anindya Banerjee.