MUMBAI, April 21 (Reuters) - The Indian rupee declined on Tuesday and forward premiums jumped after the central bank partially rolled back measures it had undertaken recently to support the under‑pressure currency.
The rupee fell 0.30% to 93.4050 per U.S. dollar, while the implied interest rate on the 1-year forward premium surged 14 basis points to 3.14%.
The Reserve Bank of India is once again allowing banks to offer non-deliverable forwards to clients and permitting companies to rebook FX contracts.
Restrictions imposed less than a month ago by the RBI that limit onshore position size of banks to $100 million remain in place, while tweaks have been made to restrictions on related party transactions.
Bankers said the RBI's rollback effectively reopens the door for corporates to arbitrage between onshore and offshore markets, a development that could put renewed pressure on the rupee in the onshore market.
Such arbitrage activity was seen by market participants as the primary reason behind the restrictions imposed in the first place, after corporates exploited price differentials created by limits on position sizes of banks, pushing the rupee past the 95 per dollar level for the first time.
While the spread between onshore‑offshore rates has narrowed over the last one-and-a-half weeks, bankers said opportunities still exist that corporates could use, which would put pressure on the rupee.
Most bankers, however, expressed doubts over whether corporates would actually engage in such arbitrage, or whether banks themselves would be willing to offer it in the wake of the recent regulatory crackdown.
For the one‑month tenor, the dollar/rupee NDF rate is now trading 7–8 paisa above the onshore market. At the height of the turmoil when RBI imposed limits on banks, this spread was nearly one rupee.
The ability of banks to engage in such arbitrage remains constrained by the RBI's $100 million cap on onshore position sizes.
Reporting by Nimesh Vora; Editing by Sonia Cheema and Ronojoy Mazumdar
Source: Reuters