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The heavy foreign selling by foreign institutional investors over the past five sessions - amounting to a net $1 billion - may have more to do with the broad rise in USD/INR forward premiums than fundamental reasons, according to three analysts.
Foreign investors are suspected to have been especially heavy sellers in treasury bills, these analysts said, probably because the yields may no longer justify the higher funding costs from rising currency forward premium costs.
The 3-month USD/INR forward is currently trading at 7.58 percent at a time when the 91-day t-bill yield has come down.
The cutoff for the 91-day t-bill came in at 7.8102 percent at Wednesday's auction, lower than the 7.8519 percent last week.
However, a fall in USD/INR forward premiums could stop the selling, according to these analysts.
"I think you will see a reversal of these trades because forwards have started drifting down. So you will not see further sell-offs," said Manish Wadhawan, director and head of interest rates at HSBC in Mumbai.
The 1-year forward premium rose to an over 14-year high at 380.50 points on Tuesday, but has eased on Wednesday to 370.50 points.
