Forward Dollar Darts Up On Fed Cut

Forward premiums zoomed by 15-20 basis points today as the Federal Open Market Committee of the US reduced the funds rate and discount rate by 50 basis points each to 2 per cent and 1.5 per cent, respectively.

The 6-month premium closed at 6.41 per cent compared with yesterday's closing of 6.24 per cent, while the 1-year premium ended at 6.22 per cent compared with yesterday's closing of 6 per cent.

Forex dealers said the market has been expecting a 25 basis point cut in the Fed rate, but the Fed has surprised the market by cutting the rate by 50 basis points and this caused the premiums to rise high. Dealers are expecting the premiums to go up further.

 

Said Shahrukh Wadia, senior vice-president and head-treasury, IndusInd Bank: "After the recent cut in the Fed rate, the differential between the Reserve Bank of India's (RBI's) bank rate and the Fed fund rate has widened. As the RBI is unlikely to cut the bank rate further in the short term, there will be a upward pressure on the forward rates."

Dealers said the expectation of a further cut in December will also push the premiums up. Wadia expects the 6-month premium to stabilise around 6.75 per cent level.

Though the prices of government securities have gone up by 40-50 paise, dealers said it was a liquidity-driven rally and the Fed rate cut have not played any role.

The treasury head of a private sector bank said, "A cut in the Fed rate affects the government securities market only when there is a possibility of RBI following that. However, in the present situation, there is no such possibility and hence there was no impact of it."