Forex Talk: RBI Measures Lift Rupee Near Term, But West Asia Tensions and Costlier Forwards Cap Gains

RBI announced various measures over the weekend to support the rupee following recent depreciation pressure on the currency. On Friday, USD/INR closed at a low of 96.73. The rupee has opened stronger today, slipping below 96 levels. We see a near-term range of 95-96 for the pair.

While recently announced RBI measures offer near term support for the rupee, the continuing tensions in West Asia, elevated energy prices, rising global bond yields along with FII equity outflows could continue to weigh on the currency and we see a reversal towards a range of 96-97 over the coming weeks. Forward premiums could continue to see increased volatility, with any moderation post the measures announced being short lived and offset by eventual pass on of higher cost by banks due to the foreign exchange reserve requirements introduced.

Today markets will also watch out for India inflation data for September (our estimate of an increase to 5.9% from 4.8% previously). For global markets, investors will await US inflation data this week (expected to rise to 3.7%).

1. The measures announced by the RBI includes: (i) restriction on rebooking of cancelled FX derivative contracts (ii) the threshold limit for undertaking FX derivative transactions without underlying exposure has been reduced from USD 100 mn to USD 5 mn (iii) authorized dealers must confirm that an underlying exposure has not been hedged with any other authorized dealers (iv) introduction of  foreign exchange risk reserve (FERR) which requires banks to park 20% of the INR equivalent amount with the RBI for forward contracts (involving INR) above USD 2 mn and (v) introduction of a special window under which the RBI undertakes sale of USD to three public sector OMCs through designated banks.

2. Impact on spot: The measures are likely to lead to near term appreciation in the rupee. The special window to meet the entire dollar requirement for three major oil companies (IOCL, HPCL and BPCL) could significantly reduce the spot dollar demand in the open market. After accounting for India’s 89% import dependency in crude oil, our calculations show that the three oil companies together process ~56% of the country’s total crude imports. 

3. Impact on forward premiums: In October till date, average value of buy trade volumes (import) in the forward contract stood at ~USD 3.5 bn. If ~80-90% of this is for current account needs (~USD 2.8 to 3.1 bn), and a similar share is assumed for notional value exceeding USD 2 mn, banks will be required to keep ~USD 480-540 mn (or ~INR 45-50 bn) with the RBI daily for meeting FERR requirement. The opportunity cost for the banks is expected to rise, and if it is fully passed to the customers, USD/INR 1Y forward premia could inch higher (Friday’s close was at 3.69%). 

4. US dollar index: Last week, the US dollar index traded between 102.05-102.30. Despite an appreciation bias, the index could not stay above the 102.30 level on a sustained basis. Any upside surprise from the market’s estimate of 3.7% in the US CPI print for September (vs 3.4% in August), due this week, could further add to the appreciation bias for the US dollar.

5. USD/JPY is trading above 158.20 level at the time of writing. The pair could continue trade in a narrow range of 157-159 in the near-term as intervention risk from the BoJ remains high. On the data front, Japan producer price inflation for September will be released on Tuesday with market estimate at 7.6%.

6. Crude oil is trading lower at USD 102.9 at the time of writing. This week, IEA will release its monthly report that would give an estimate about the global demand and supply conditions. President Trump announced that the US has entered into a deal with Russia, with the latter supplying diesel to the US and global markets, potentially lowering the pressure on global diesel prices.

EforexIndia Treasurey