Plunging Indian rupee forward premiums spur importers to hedge longer

A man counts Indian currency notes inside a shop in Mumbai

By Nimesh Vora

MUMBAI (Reuters) - The fall in the Indian rupee's forward premiums to the lowest level in more than a decade is prompting importers to hedge beyond the near term, analysts said on Friday.

The USD/INR forward premiums have tumbled this year, fuelled by a jump in Treasury yields. U.S. yields have surged in the wake of aggressive rate hikes by the Federal Reserve.

(Rupee impled yield down almost 250 bps this year https://graphics.reuters.com/INDIA-MARKETS/RUPEE/znvnbdomgvl/chart.png)

The Reserve Bank of India's forward dollar sales aimed at managing the rupee's volatility without impacting liquidity have further amplified the pressure on the currency's premiums.

The 1-year USD/INR implied has fallen to near 2.25%, hovering near its lowest level since 2011.

"Given the fact that the premiums have come down as much as they have, we see that some of our importer clients are more willing to elongate the hedges," a manager at a leading private sector bank said.

"Its just that the lower cost of hedging has made importers open to the idea of covering beyond the usual one to two month tenors."

Considering that high rupee volatility and the fall in the cost of hedging, there is "definitely" less reluctance to hedge beyond the near months, Dipti Chitale, senior vice president - risk management advisory at Mecklai Financial, said.

"Importers are covering five to six months forward, which is a change from the past when they would do a maximum of two months."

For exporters, the story is the exact opposite, Chitale said, adding that they are now looking at only short-term hedges.

The inverted rupee forward yield was "an added encouragement" to look for longer term hedges, a trader at a separate private bank said.

Rupee short term forward yields are currently higher than long term yields.

(An inverted rupee premiums yield curve https://graphics.reuters.com/INDIA-MARKETS/RUPEE/lbvggrdxnvq/chart.png)

(Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)