As forward dollar premia fall, exporters resort to selling

With the rupee stabilising, forward dollar premia have fallen, prompting exporters to sell forward contracts.

Forward premium is the spread between the prevailing exchange rate and the higher level used in forward currency exchange deals.

Forward transactions in the currency market are either at a premium or a discount to the currency’s spot rate. Typically, the maturity dates of forward transactions vary from a few months to a year. The one-year forward premium, about eight per cent in September 2014, has dropped to 6.83 per cent, while the six-month, three-month and one-month premia, all about eight per cent a few months ago, have dropped to 7.3 per cent, 7.78 per cent and 7.73 per cent, respectively.

“The interest rate cycle is going to go downwards, due to which forward premia will fall further. There will be an appreciation bias for the rupee because the current account deficit (CAD) situation is quite favourable and inflows are strong. By May, forward premia will fall by 50-70 basis points and the fall will be more at the longer end,” said Anindya Banerjee, currency analyst, Kotak Securities. He added if the Reserve Bank of India (RBI) didn’t cut the policy rate again in February, a cut was likely by April, which would bring forward premia down in May.

On Thursday, RBI had cut the repo rate by 25 basis points to 7.75 per cent and it is expected more rate cuts are in the offing this year. A sharp rise in gold imports and a fall in export growth pushed the CAD to $10.1 billion (2.1 per cent of gross domestic product, or GDP) in quarter ended September from $5.2 billion (1.2 per cent of GDP) in the year-ago period. For the quarter ended June 2014, the deficit was $7.8 billion (1.7 per cent of GDP), according to RBI data.

“Some large companies that export might have taken a view that the rupee will be stable, due to which these entities are selling dollars. This is because they will be interested in earning a premium on existing levels. If the rupee remains stable, forward premia will drop drastically. If the premia see a sharp fall, exporters will lose if they do not sell forwards,” said Ashutosh Khajuria, president (treasury), Federal Bank.

However, some companies say the rupee will see a depreciation bias.

“Today(Tuesday), the rupee is stable because crude oil prices are at the lowest level. But in six to nine months, these prices might move up again. If that is the case, our CAD might move up because we are an import-sensitive and import-intensive country. If CAD moves up with a rise in crude oil prices, inflation will rise and the rupee will depreciate. Over a longer time horizon, the rupee will depreciate,” said Prabal Banerjee, president (international finance), Essar Group.