FX premium is shooting through the roof with 3M around 9% and 12M above 6%. While this is considered good for the rupee (to lead dollar supplies and lag dollar demand in the forward market), the risk is from adding to pressure on rupee liquidity. Rupee loans have become attractve now; thus shifting credit demand from dollars to rupees. Export finance will be cost effective by funding in rupees and selling dollars forward to enjoy 9% premium for 3M. Those who have access to rupee funds at 10.0-10.5% would get effective dollar cost of 1.0-1.5% against PCFC rate of L+3.5%. This will also lead to higher short term MM rates which is already above 10%. Over all, tight liquidity and high cost of short term liquidity stays firm despite RBI's shift into dovish monetary stance.
RBI may need to drive premium down into 7% in 3M and 5% in 12M to provide downtrun in short term money market rates at the risk of pushing USD/INR into 50.50-51.00. This will be considered as balancing act to manage rupee exchange rate; tight liquidity and high cost of short term liquidity. This will be yet another balancing act for RBI in addition to balancing inflation and growth dynamics.
We may need to stay prepared for near term rupee weakness into 50.50-50.65. Exportes can recive Feb/Dec premium (currently at 244) and await spot weakness into 50.50-50.65 which would give 12M forward value around 53.50 which is not considered bad.
Let us watch spot rupee to hold at 50.00-49.85 for reversal into 50.50-50.65 and consider 12M premium good to receive at 6.15-6.25%. In the meanwhile Banks can shift PCFC/FCL book into rupee funding by receiving April premium at 8.75-9.0%; giving rupee yield of over 12.5% for 3M tenor. Sustainability of high FX premium for extended period of time will extend rupee gains beyond 49.85 into 49.60 ahead of 49.20. Over all, rupee stability within 49.50-50.50 is achieved with overshoot limited to 49-51. This stance will be valid till April 2012.
Moses Harding
RBI may need to drive premium down into 7% in 3M and 5% in 12M to provide downtrun in short term money market rates at the risk of pushing USD/INR into 50.50-51.00. This will be considered as balancing act to manage rupee exchange rate; tight liquidity and high cost of short term liquidity. This will be yet another balancing act for RBI in addition to balancing inflation and growth dynamics.
We may need to stay prepared for near term rupee weakness into 50.50-50.65. Exportes can recive Feb/Dec premium (currently at 244) and await spot weakness into 50.50-50.65 which would give 12M forward value around 53.50 which is not considered bad.
Let us watch spot rupee to hold at 50.00-49.85 for reversal into 50.50-50.65 and consider 12M premium good to receive at 6.15-6.25%. In the meanwhile Banks can shift PCFC/FCL book into rupee funding by receiving April premium at 8.75-9.0%; giving rupee yield of over 12.5% for 3M tenor. Sustainability of high FX premium for extended period of time will extend rupee gains beyond 49.85 into 49.60 ahead of 49.20. Over all, rupee stability within 49.50-50.50 is achieved with overshoot limited to 49-51. This stance will be valid till April 2012.
Moses Harding
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