The trend in the forward market is guided by the various factors viz., forward dollar supply and demand, intervention-related paying or receiving interest and interest rate outlook on the USD/INR currency pair. To some extent, the directional trend in the rupee/dollar exchange rate also guides the forward market trend.
Due to higher domestic retail inflation, the repo rate cut by RBI in the next 2 policy meetings can be ruled out. As the short-term money market yields upto 6-month maturities are moderately rising, the interest rate differential between the USD and INR has widened, which led to a rise in forward dollar premia for 3 to 12-month maturities.
The forward curve looks almost flattened between 3 and 12-month tenors. The forward market differential between the 3-month and 12-month forward dollar premium is about 0.08% per annum positive. The broad stability in the exchange rate has also influenced the importers to hedge their short-term and medium-term payables which led to a moderate rise in forward dollar premia upto 6-month tenor. However, the forward dollar premia upto 2-month maturities are ruling lower at 3.65% per annum triggered by lower overnight call rates. The interest rate outlook in the domestic market and the status-quo on USD short-term interest rates amply indicate a modest firm trend in the forward market to prevail upto the end of the current fiscal.
As the rupee is not a fully convertible currency on capital account, the forward market differential for any specific maturity upto 1-year tenor will not match with the interest rate differential between the currency pair for the chosen maturity. The forward dollar premium or discount between the US dollar and other convertible currencies for any specific chosen maturity would fully represent the interest rate differential between the currency pair, unlike in the domestic context.
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