Spot Edges Up, Forwards Retract With Gilt Yields

The rupee recovered by four paise against the US dollar today to close at 48.6700/6750. Forward premiums, however, fell in line with the slide in government security yields and on expectations of a repo rate cut by the Reserve Bank of India (RBI).

The Indian unit opened at 48.71/72 to a dollar and remained at the same levels during most of the day. The rupee, however, strengthened in the afternoon. According to forex dealers, there were dollar supplies from a telecom firm which pushed up the rupee. Said a dealer with a foreign bank: "The volume of trading was low and the rupee remained rangebound around yesterday's closing levels."

Forward premiums dipped as government security yields continued to go down. The one-year forward premium closed at 5.10 per cent as against yesterday's closing of 5.14 per cent. The six-month annualised premium ended the day at 5.30 per cent as against yesterday's closing of 5.40 per cent.

Said a dealer with a private sector bank: "The forward premiums followed the movement in government paper yields. Moreover, with the yield curve becoming inverted at the shorter end of the money market, there are expectations that the repo rate may be cut by at least 50 basis points."

The spot rupee will remain under pressure tomorrow. According to dealers, in the absence of major dollar supplies, the movement of the currency will largely depend on whether public sector banks buy dollars from the market. The expected range for the Indian currency will be 48.65 to 48.75.

The forward premiums are expected to dip further as the easy liquidity favours the government paper yields to dip further. The expected range for the six-month annualised premium is 5.28-5.33 per cent. One-year premium should hover in the range of 5.07-5.12 per cent.