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As RBI expands FX intervention toolkit, importers’ hedging cost comes crashing.

Date: 19-05-2022
Subject: As RBI expands FX intervention toolkit, importers’ hedging cost comes crashing
MUMBAI: Costs of covering currency risks plunged across maturities despite the slide in the local unit’s value, underscoring the benefits for importers of the central bank’s derivatives-focused intervention strategy geared toward preserving India’s foreign-exchange reserves.

The premium has dropped 61-67 basis points across maturities up to 12 months in just one fortnight. Instead of spot-market intervention alone, the central bank’s intervention strategy in the currency markets is also set to include forwards contracts.

"These declines in forward premium is a clear reflection of the central bank's intervention approach," said Abhishek Goenka, CEO at IFA Global, a treasury and wealth management company. "The central bank is protective of the forex reserves in an uncertain global environment. Importers, who were reluctant earlier, are now finding attractive levels to buy forward contracts that will arrest any rise in offshore liabilities due to a falling rupee."

The rupee closed a tad lower at 77.58 per dollar Wednesday. It hit a record low at 77.80 a day earlier.

In a surprise turn of events, the Reserve Bank of India (RBI) on May 4 raised the policy repo, at which banks borrow short term money from the central bank, by 40 basis points.

The central bank has been intervening to arrest the rupee’s rout through futures, forwards (both onshore and offshore) and spot exchange rate markets.

The one-month forward contract yielded 3.37 percent Thursday versus 4.03 percent on May 5, a day after the RBI rate decision, showed Bloomberg data compiled by ETIG. The gauge indicates a forward premium in percentage terms.

"With interest rate differentials widening, the forward premiums should have risen," said Anindya Banerjee, currency analyst, Kotak Securities. “Instead, they reported significant drops with absolutely no dollar shortage in the system. This is only reflecting the central bank's tweaked intervention strategy, which may be aimed at protecting forex reserves.”

“Lower premiums are prompting importers to avail cheap hedges amid the overall trend of Rupee depreciation," he said.

The RBI seems to have sold dollars in the spot only to get in a buy/sell swap deal in the onshore forwards contracts across maturities. This frees the central bank from delivering dollar stocks immediately after spot sales.

The Basis Swap Spread between Euro and USD, a benchmark for global dollar shortage, yielded -22.79 on Wednesday, Bloomberg data showed. It was around -30 when the Russia-Ukraine war began in February. It was as wide as -139.25 when the corona virus had brought the whole world to a standstill.

“The drop in forwards premium post the sudden rate hike has added to importers’ comfort,” said Kunal Sodhani, AVP, Treasury at Shinhan Bank. “Those companies, which are already facing the brunt of inflation, can now have good reasons to cover offshore liabilities.”

“A central bank intervention-backed by forwards and an overplay of optical dollar shortage led to lowering forwards premium,” he said.

The current level of forex reserves provides for 10 month of imports.

Source Name:- Economic Times

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