RBI’s Rate Pause, Weaker Dollar Bring a Bonanza for Re Arbitrageurs
Mumbai: Reserve Bank of India’s altered policy stance on credit costs has revived speculation in the rupee after traders had settled for a restricted operating range for the local currency against the dollar since the inauguration of Donald Trump as the US President.
The difference between onshore forwards and offshore non-deliverable markets is about six to 12 paise across contracts ranging from one to three months in maturity. The gap was non-existent until the Reserve Bank of India this week signalled either an end or a long moratorium on its rate-easing cycle that had driven the cost of funds down by 150 basis points in India since 2015.
After the change in credit stance, traders have gone long on the dollar overseas, while short-selling the unit on the futures and forwards markets locally, dealers said. The overseas market is trading at a discount to the spot market in Mumbai.
“Volatility is back in the currency market with arbitragers turning active,” said Aninday Banerjee, currency analyst at Kotak Securities. “The rupee has been range-bound without any sharp swing until the RBI policy. But the new policy stance has moved the rupee, which is also mirroring other emerging market currencies that are all gaining against the dollar, with the US President advocating a weaker dollar of late.”
The global dollar weakening too has weighed on the rupee, which tracked other rising emerging market currencies. The dollar index, which measures the unit against six major currencies, was at 100.500 at the close of local market hours compared with 102.010 a month ago. The central bank has kept the policy rate unchanged but changed its policy stance to ‘neutral’ from ‘accommodative’, capping possibilities of further rate cuts.
“RBI’s policy stance has primarily stirred up the currency market after a prolonged lull,” said Keta Kurkute, VP, forex risk advisory, at consultancy Mecklai Financial. “Foreign entities were mostly seen shorting the greenback in domestic forwards market through the week, tapping the arbitrage opportunities.” The rupee may be in the range of 66.50-67.30 per dollar over the next few weeks, dealers said. In the past four trading sessions, the rupee has strengthened 0.79% versus a 0.75% rise during five weeks beginning January. The rupee was a tad weak on Friday closing at 66.88 per dollar. The central bank is believed to have intervened to stem the rupee’s sudden rise, an intervention that has helped shore up its forex reserves.
“Recent RBI stance has limited the possibility for further rate cuts, and this could well trigger overseas investor inflows back in the domestic markets,” said Kurkute.
If Indian rates do not fall further amid expected US Federal Reserve rate rises, this helps maintain gap or spread, a key trigger for foreign portfolio investors (FPI) buying Indian securities.
In February, FPIs have net invested ₹ 5,827 crore worth of domestic securities compared with ₹ 3,496 crore net sold a month earlier, show data from NSDL.