Fii Inflows To Keep Pumping Up Rupee
At a conservative estimate, spot rupee is expected to rule in the Rs 46.25/35 per dollar range this week, backed by abundant foreign exchange inflows coming through foreign institutional investors (FIIs).
The FII money is finding its way into the Indian markets as the interest rates are ruling relatively higher here compared with the rates in the US. For a one-year tenor, while the local rate is above 5 per cent, the US treasury rate is below 1 per cent.
In fact , most of the dealers harbour the view that if the Reserve Bank of India (RBI) stays away from the market, the rupee can easily touch 46 per dollar. This, however, is a remote possibility that will make exports uncompetitive compared with the south east Asian countries.
After the rate cuts announced by European Central Bank and the US Federal Reserve, some of the south east Asian economies have also followed suit due to their heavy dependence on exports.
This has made the Indian markets a lucrative parking place for FII money. Last week, spot rupee closed at a 32-month high of 46.33/34 per dollar owing to the torrent of portfolio investments.
The entire week saw two-way movement. Almost everyday, spot rupee used to open higher and go up only to be tempered by dollar buying by state-owned banks at the behest of the Reserve Bank of India.
In fact the rupee has long breached the psychological barrier of 46.50 and reached 46.30 per dollar last week.
On account of cross-currency movements, it was seen that the rupee continued to strengthen against the dollar even as dollar continued to gain against euro, yen and pound sterling.
Analysts attribute the rise in rupee to sound fundamentals and the interest rate differential.
Forward premiums
Forward premium on the rupee will remain rangebound and rise upward gradually due to pressure from FIIs who are buying rupees for covering dollars in the forward market.
These inflows, in fact, are being invested in treasury bills and other short-term instruments, which are fetching relatively high interest rates.
This week will see the debut of rupee dollar options. Thus there will be one more product available to forex dealers to hedge the underlying currency risk along with forward premiums on the dollar calculated on the basis of interest rate differential between the currencies of the two countries.
Coming back to forward premiums, exporters are also expected to sell dollars by booking forward which will again put pressure on rupee funds.
The premium in the one-year segment is likely to go up steeply as most of the demand is reported to be emerging in that tenor along with the extreme short-term indicated by the one-month tenor.
However, the inverted yield curve for the forward premium continues with the one-month rupee commanding a higher premium than the one year rupee.
Last week, forward premiums continued to rule at higher levels backed by demand from exporters and FIIs.
However, in the middle of the week, demand started to wane taking off the pressure from the rupee, which resulted in the premium softening a bit.
But this did not spawn any substantial decrease in premium that was witnessed in May