By Jaspreet Kalra and Nimesh Vora
MUMBAI (Reuters) – A three-month rally in dollar-rupee futures premiums is expected to continue amid bets on another excessive U.S. rate cut as India’s central bank moves cautiously toward monetary easing, six bankers said.
The dollar/rupee 1-year implied yield rose for the sixth straight session on Monday to 2.38%, the highest in nearly a year and a half.
The 1-year implied yield has risen nearly 75 basis points over the past three months as investors priced in faster and deeper U.S. interest rate cuts.
Forward premiums reflect the interest rate differential between the US and India and are therefore affected by expectations of the future development of interest rates in the two economies.
Higher premiums, reflecting a widening gap between interest rates, make currency hedging more expensive for importers.
The gap between US and Indian interest rates is expected to widen as the Federal Reserve could opt for faster monetary easing to protect a slowing labor market, while India’s central bank continues to focus on keeping inflation under control.
Fed policymakers surprised most economists last week when they kicked off the rate-cutting cycle with a 50 basis point cut. The probability of a similar rate cut in November has risen to 50%, according to the CME FedWatch tool.
Given the increased odds, the risks are in favor of dollar/rupee futures premiums maintaining their upward trend, said six FX spot and swaps traders at various banks.
The market is likely to remain interested in entering put/call swaps or “paying” the futures market, said Apurva Swarup, vice president at Shinhan Bank India. He expects the 1-year implied yield to rise to 2.60%.
The 1-year US-India yield spread, based on overnight indexed swaps, stood at 2.62% compared to 2.38% reflected in forward premiums, suggesting room for upside in premiums.
(Reporting by Jaspreet Kalra and Nimesh Vora; Editing by Mrigank Dhaniwala)