RBI's Indian rupee boost to spur rally, trigger swings in forward premiums

Business Recorder reported that the Indian rupee was expected to gain about 1% at Monday's opening, moving to between 95.60 and 95.90 per dollar from its Friday close of 96.73. The move follows a series of steps by the Reserve Bank of India aimed at reducing demand for dollars. Traders linked the expected recovery to the central bank's Saturday measures.

On Saturday the central bank stopped users from rebooking cancelled rupee-linked derivative contracts, lowered the threshold for deals made without underlying exposure, and required banks to hold 20% cash against certain foreign-exchange contracts. These changes could make protection against a weaker rupee more expensive and pass higher bank charges on to clients. The RBI also opened a special window that lets oil marketing companies buy dollars directly from it, bypassing the open market.

Barclays strategist Mitul Kotecha said the measures change where and when dollars are bought, but not the underlying forces such as oil import bills, trade and capital outflows. He still sees the rupee weakening in a controlled manner. He added that lower importer demand could push forward premiums down, while higher balance-sheet costs, thinner liquidity and central bank management of its forward book could push them up.