One-month dollar-rupee forward rate curve inverts on arbitrage bets

The one-month USD-INR forward rate is now higher than one- and two-year forward ra­tes, an anomaly bro­ught on by arbitrageurs playing between the offshore and onshore markets.
 
The one-month forward rate is at 4.9 per cent, while the one-year is at 4.6 per cent. The 2-year forward is also flat at 4.60 per cent.
 
“Short-term forward yield is higher on account of arbitrage between offshore and onshore. In other words, higher offshore points are getting transmitted onshore,” said Abhishek Goenka, managing director at IFA Global.
 

The arbitrage opportunity arises because even as the onshore market clo­ses by the evening, the offshore market remains functional round-the-clock. he bidding continues as usual there, which gets reflected in the onshore market when it opens the next day.

 
Currently, many players are utilising these arbitrage opportunities, even as currency dealers say this is temporary.
 
The rupee has come under pressure owing to unwinding of carry trades. As India’s interest rates remain low but the US' 10-year bond yields inches up to 1.6 per cent, the spread between the two is contracting. This has led to foreign investors cutting their positions on rupee. “It will be interesting to see whether the RBI rolls over its maturing long forward positions. If it does so, it would push forwards higher, thereby making carry attractive again and that too could ease pressure on the rupee,” Goenka said.

 
High short-term forward rates and low longer-term rates is not necessarily bad news, particularly from a hedging perspective. And importers are making judicious use of that, say currency dealers.
 
Overall, the rupee is unlikely to have a free fall, dealers say. There would be a lot of sideways movement in rupee, and that may give rise to such oddities as an inverted forward curve. But the rupee is unlikely to witness one-way pressure unless there is a sudden outflow.
 
 With the US Fed committing to continue with its easy money stance, the possibility of a taper tantrum-like event is also very little. For now, though, low short-term US yield is putting pressure on the US dollar, which is good news for emerging markets currencies, say experts.

 
If the rupee gets back to its strength again, the short-term forward rates will start falling and the inversion would correct on its own.