Rupee dips as hedging demand eclipses softer dollar, premiums extend surge

MUMBAI, Dec 23 (Reuters) – The Indian rupee weakened slightly on Tuesday despite a broadly softer greenback as corporate dollar demand remained persistent while dollar-rupee forward premiums continued to barrel higher to multi-year peaks.

The rupee was at 89.7150 against the U.S. dollar, as of 11:00 a.m. IST, down marginally from its close at 89.65 in the previous session.

Elevated demand to buy dollars at the daily reference rate weighed on the rupee on Tuesday, traders said.

While the spot markets were largely rangebound, forward premiums continued to march higher as banks fretted over excess dollar liquidity in the banking system and pointed to sustained dollar buying in the non-deliverable forward market.

The 1-month dollar-rupee forward premium climbed to more than 55 paisa while the 1-year implied yield touched an over 3-year peak of 3.29%.

Two traders pointed out that state-run banks had received premiums on the far tenors, most likely on behalf of the Reserve Bank of India, helping cool off the rise.

Surging forward premiums can raise the cost of locking in hedges for importers while also making hedging more attractive for exporters.

FX advisory firm Finrex Treasury Advisors recommends that exporters should hedge only at 90 and above (on USD/INR) while the spot sales may be made at the highest level for the day around 89.75.

“Importers may buy the dip and wait for RBI to hit the market with dollar sales,” said Anil Bhansali, head of treasury at Finrex.

Elsewhere, the dollar index was down 0.2% at 98.03 while Asian currencies were mixed. India’s benchmark equity indexes, the BSE Sensex and Nifty 50 were both little changed.