The Indian rupee slid to a new low of 96.96 against the US dollar during intra-day trade on Tuesday, while one-year outright forward rates for the rupee breached the 100 level. The domestic currency closed at 96.82, down 29 paise from its previous close of 96.53, according to reports by Mayur Shetty.
Understanding One-Year Outright Forward Rates
A one-year outright forward spot rupee transaction is a foreign-exchange contract where the exchange rate for a USD/INR trade that will settle one year later is agreed upon today. The premium on the one-year outright forward spot rupee indicates the interest-rate differential and hedging demand built into the USD/INR forward rate, not just a prediction of where the spot rate will be in a year.
According to the CCIL website, the one-year premium on the dollar opened at 321 paise, rose to a high of 322 paise, and was last quoted at 302 paise.
Dealers: Rupee Prevented from Breaching 97 Level
DBS treasury head Ashhish Vaidya said, “Because of the ongoing West Asia conflict and consequent higher oil prices, the rupee is finding little support, with risks of the current account deficit overshooting. The India-US rate differential is too narrow — an overseas investor can earn about 4.65% in US dollar bonds, versus roughly 3.04% in India after hedging. That weakens the case for debt inflows. India needs to lower FX (forex) forward costs or interest rates to attract foreign capital, which remains critical for growth.”
Dealers said that the rupee was prevented from breaching the 97 level due to the sale of dollars by public sector banks, ostensibly on behalf of the Reserve Bank of India (RBI). A rate hike by Indonesia following pressures arising out of the US-Iran war has raised expectations of central bank action in other emerging markets as well.
Vulnerability to US-Iran Conflict
According to a Bloomberg report, Indonesia, the Philippines, and India are seen as the most vulnerable to the US-Iran conflict, with their central banks coming under pressure to take policy action. The dollar index has risen over 1% in May due to safe-haven demand and markets pricing in chances of the Federal Reserve hiking interest rates by the end of the year. Dealers now forecast a 50% chance of a Fed rate hike by December.
