India central bank's large rate cut squeezes forward premiums, leaves rupee vulnerable, analysts say

0
899

India central bank's large rate cut squeezes forward premiums, leaves rupee vulnerable, analysts say

Nimesh Vora and Jaspreet Kalra

2 min read

By Nimesh Vora and Jaspreet Kalra

MUMBAI (Reuters) -The Reserve Bank of India’s surprise outsized rate cut last week will leave the rupee vulnerable to further depreciation by pressuring already depressed foreign exchange forward premiums, several analysts said on Monday.

The rupee has underperformed its Asian peers in 2025 amid weak capital flows. A narrowing interest rate differential — with the U.S. Federal Reserve moving slower than the RBI in cutting rates — suggests the Indian currency may continue to lag.

MARKET REACTION

The 1-month U.S. dollar/rupee forward premium — typically more sensitive to liquidity conditions — fell to 7.5 paisa, its lowest level since November.

Meanwhile, the 1-year premium, which is more responsive to rate differential between the U.S. and India, declined to 1.5250 rupees, marking its lowest level in nearly a year.

GRAPHIC:

WHY IT'S IMPORTANT

A drop in dollar/rupee forward premiums makes the rupee less attractive for carry trades, and diminishes the incentive for exporters to hedge future receivables.

At the same time, it raises the likelihood that importers—who typically hedge near-term payment obligations—will step up their hedging activity.

The decline in premiums - a less favourable rate differential between the U.S. and India - could leave the rupee open to sharper depreciation.

CONTEXT

Against the backdrop of benign inflation and the need to support growth, the Reserve Bank of India last Friday delivered a larger-than-expected 50 basis point rate (bps) cut, exceeding the 25 bps anticipated by economists.

In a further easing move, the central bank slashed the cash reserve ratio for banks.

KEY QUOTES

"One thing the rupee had going for it is that it offered attractive carry ... with the 50-bps rate cut from the RBI, carry attraction has been reduced," Mitul Kotecha, head of FX and EM macro strategy Asia at Barclays, adding that in an environment where investors are again focussed on carry, the rupee's appeal has been diminished.

Falling premiums can be a "mild added headwind" for the rupee amid globally elevated yields, Dhiraj Nim, FX strategist at ANZ Research, said, and pointed out that if India growth data weaken, there could be scope for one more rate cut.

(Reporting by Nimesh Vora, Jaspreet Karla; Editing by Harikrishnan Nair)


Search
Categories
Read More
News
This millennial was rejected from 200 jobs—now he makes millions charging wealthy families six-figures to get their kids into the Ivy Leagues
This millennial was rejected from 200 jobs—now he makes millions charging wealthy families...
By Mystic Queen 2025-06-23 05:00:15 0 734
News
President Donald Trump Broke His Vow Not to Tax Social Security Benefits -- and Retirees Are Being Given This Concession Instead
President Donald Trump Broke His Vow Not to Tax Social Security Benefits -- and Retirees Are...
By Mystic Queen 2025-06-19 16:01:40 0 818
News
Mortgage and refinance interest rates today, June 17, 2025: A small change as the Fed meeting looms
Mortgage and refinance interest rates today, June 17, 2025: A small change as the Fed meeting...
By Mystic Queen 2025-06-18 05:00:13 0 916
Mysticism
9 Mistakes On The Path to Enlightenment
9 Mistakes On The Path to EnlightenmentDuring my years as a seeker, I stumbled into numerous...
By Mystic Queen 2025-06-11 21:41:19 0 889
Networking
Wolf made famous in 'Game of Thrones' brought back from 12,500-year extinction, US company claims
Wolf made famous in 'Game of Thrones' brought back from 12,500-year extinction, US company claims...
By Mystic Queen 2025-06-01 08:36:12 0 1K
AtoZ Buzz! Take Control of the narrative https://atozbuzz.com