Indian rupee upside limited by low forward premiums - bankers

FILE PHOTO: Illustration photo of an India Rupee note

By Nimesh Vora

MUMBAI (Reuters) - Low forward premiums on the Indian rupee, triggered by a narrower interest rate differential between the U.S. and India, will make it difficult for the currency to rise much above current levels against the dollar, two bankers told Reuters.

The U.S. Federal Reserve's aggressive rate-hike cycle relative to the Reserve Bank of India last year has prompted U.S. and India interest rate differentials to decline, pushing forward premiums to levels not seen in over a decade.

"The forward premium level is so low it is a natural incentive for exporters to not sell dollars and for importers to buy," B Prasanna, global head – global markets – sales, trading and research at ICICI Bank told Reuters.

The 1-year rupee implied forward premium in 2022 has fallen from 4.63% to 1.61% - the lowest level in over a decade, before ending the year at 2.02%.

GRAPHIC : Rupee forward premiums since 2009 - https://www.reuters.com/graphics/INDIA-RUPEE/PREMIUMS/zdpxdrrllpx/chart.png

In 2022, the Fed raised rates by 425 basis points while the RBI increased borrowing cost by 225 bps, prompting premiums to tumble.

"I suspect that the rupee will not appreciate beyond a point," Prasanna said, adding that he expects the currency to trade within a range of 81.50 to 83.50 to the dollar in the current quarter.

A pullback on the dollar index on account of a less hawkish Fed view has helped the rupee recover from a record low of near 83.30 in October, and the local currency was trading at near 81.70 to the dollar on Thursday.

However, the outlook for the rupee remains "fundamentally weak" and the low level of forward premiums increases "the propensity for importers to hedge", Bhaskar Panda, head overseas treasury at HDFC Bank, said.

"Premium levels have an impact on the behaviour of importers and exporters to an extent."

The Indian rupee has climbed nearly 1.4% in the last three sessions, but HDFC Bank does not expect this to sustain and is also projecting a range of 81.50-83.50 for the unit in the current quarter.

The weakening bias on the rupee, alongside the inexpensive premiums, make it more likely that importers will hedge, Madhavi Arora, lead economist at Emkay Global Financial Services, said.

(Reporting by Nimesh Vora; Editing by Nivedita Bhattacharjee)