By Jaspreet Kalra
MUMBAI (Reuters) – Dollar-rupee forward premiums and very-near-tenor swap rates dipped on Wednesday as some of the excess dollar liquidity in the banking system was drained and on expectations of an interest rate cut later this week.
The dollar-rupee overnight swap rate eased to about 0.55 paisa on the day, commensurate with the prevailing rupee call rates, after staying elevated for the better part of December and January.
That was partly because of the sheer volume of dollars pumped into the banking system due to the Reserve Bank of India’s routine interventions to cushion the rupee’s fall, traders said.
While very near tenor interbank sell-buy swaps to manage the surplus dollars had pushed up swap rates, the RBI absorbed some of the excess via a $5 billion buy/sell dollar-rupee swap last week.
The swap was part of the central bank’s slew of liquidity-boosting measures, which have so far helped ease the deficit to 382 billion rupees ($4.39 billion) on Feb. 4 from 3.16 trillion rupees ($36.28 billion) less than two weeks ago.
A softer overnight swap rate also helped bring down near-tenor dollar-rupee forward premiums, while far forward premiums were weighed down by expectations of an RBI rate cut by 25 basis points (bps) at the end of this week.
The 1-month forward premium dropped to 17.75 paisa, while the 1-year implied yield declined 4 bps to 2.15%.
A rate cut would keep the 1-year yield between 2.10% and 2.35%, while a pause could boost the yield to 2.70%, a trader at a state-run bank said.
Meanwhile, the rupee was slightly weaker on the day at 87.1350 per U.S. dollar as of 10:20 a.m. IST. Asian currencies were trading mixed.
“The rupee is likely to remain volatile amidst global headwinds, fluctuating between 86.80 and 87.20,” said Amit Pabari, managing director at FX advisory firm CR Forex. ($1 = 87.1100 Indian rupees)
(Reporting by Jaspreet Kalra; Editing by Savio D’Souza)
