March-end forward premia jumps as banks convert dollar for rupee

Forward rates for March and April have risen significantly because of a peculiar phenomenon of banks converting dollar holdings into rupees to sh­o­w higher rupee deposits bef­ore the financial year closes.
 
Banks sell the dollar in the market and get rupee liquidity. However, when the new fiscal starts, the same banks buy the dollar back and releases rupee liquidity into the market. 
 
These transactions happen through swaps, in which banks sell dollars on the spot market and buy dollars in the forwards in April. This then significantly pushes up forward premia for April. 
 
This year, the premium for April has shot up to 6.5 per cent, which is significantly higher than what it should be. The pressure on the dollar gets evident from March, but it much higher this year. 
 
The ‘spot-next’ rate for dollar rupee for March end is now 14 paise, against the 7-8 paise witnessed every year. In the normal course, the spot-next rate should be 1 paise. 
 
However, it is April and May where the pressure is most evident. According to Samir Lodha, managing director and CEO of QuantArt Markets Solution, for April 2, the premium has jumped to around 28-29 paise, from 14 paise on March 31, and for April end, the premium is around 53 paise. For May end, it is 84 paisa. The premium charged in percentage terms work out to over 10 per cent for March end, 6.4 per cent for April end, and 5.8 per cent for May end.

 
These rates are nothing to panic about as it is a natural phenomenon caused by certain quirks in accounting rules. However, they could cause some trouble for importers. 
 
“Importers should not look only at premium, but at final levels, including spot. While exact an recommendation is difficult to provide without company specific data, in general it would be prudent to maintain a very high hedge ratio for imports as one enters April,” said Lodha. 
 
Currency dealers say the premium has been high of late, and the six-month premium of 5.30 per cent is around 1.75 per cent higher than what interest rate parity (between the US and India) would justify.
 
The rise in premia has largely been caused by the Reserve Bank of India’s intervention in the forwards market. From about 3.5 per cent at the beginning of December to about 6 per cent now, the three-month forwards rates are the most affected. Similar trends can be seen in six-month and one-year forwards as well. Even the five-year segment has seen a jump.