Rupee Seen Staying Under 42.20 Per $

FOREX Market

The spot rupee is expected to trade in the band of 42-42.20 to the dollar with the possibility of appreciation to under 42 not ruled out. Six-month premiums are expected to hover around 10 per cent.

The fact that banks and authorised dealers, acting on behalf of foreign institutional investors (FIIs), may approach the Reserve Bank of India (RBI) in order to buy foreign exchange directly from the RBI at the prevailing market rate should reduce the pressure on the spot rupee.

It might be recalled that after having traded at an all time low of 42.44 against the dollar by Friday, the spot rupee had appreciated to close at 42.00-05 as against 42.30-32 on Thursday. The near-term premiums had declined in line with the surplus funds in the banking system but the central bank advised banks from arbitraging between the money and forex markets and also allowed FIIs to cover forward exposures.Thus premiums went up across-the-board, more so at the short end with the arbitrage link between markets not being exploited.

Therefore last week one-month premiums closed at 10.74 per cent (6.52 a week ago), three month at 10.81 per cent (8.42 per cent), six month at 10.04 per cent (9.25 per cent), and one year at 9.63 per cent (9.25 per cent).

The market appears split on the extent of decline in premiums, especially at the short-end, but there seems to be agreement that there should some easing in the forwards on account of two factors: the package announced by RBI on Thursday and the 100 basis point cut in the repo rate announced on Saturday.

On Friday the market was groping for direction and premiums were volatile but things are expected to clear up this week.

Some dealers believe that given the high premia in the near-term, there should be more `receiving' and premiums should ease. However, forwards will remain firm at the medium- to far-end.