The Indian rupee declined on Monday from a one-month peak, weighed down by elevated dollar bids in the non-deliverable forwards market and a pickup in corporate hedging interest. The rupee was at 89.60 against the U.S. dollar, as of 10:20 a.m. IST, down 0.4% on the day.
The currency had climbed sharply in the closing minutes of spot trading on Friday, boosted by heavy-handed intervention from the Reserve Bank of India, but shed those gains in early trading on Monday.
Traders were also reorienting themselves after last week's price action saw the rupee move in its widest trading band in more than five years. "For now, volatility remains the theme. Much will depend on follow-through in RBI actions and global dollar moves," said Amit Pabari, managing director at FX advisory firm CR Forex.
The rupee slumped to its all-time low of 91.0750 on December 16, before recovering sharply to end the week stronger above 89.50 on the back of two firm interventions by the RBI.
Despite the rupee's near 2% recovery from all-time lows, dollar-rupee forward premiums have stayed on the boil. On Monday, the one-month forward premium surged to 43 paisa, while the one-year implied yield rose 6 basis points to 2.89%, both hovering at multi-year highs.
Excess dollar liquidity, traders unwinding positions and hedging demand have all contributed to the rise, traders said, which have pushed up the one-year yield nearly 70 basis points this month.
While a surge in premiums makes it more expensive for companies to hedge against the rupee's weakness, it also raises the cost for speculators to wager against the currency. "Given how elevated the forwards are right now, it can be very punitive to be long USD/INR," said a trader at a Singapore-based fund, adding that the risk of interventions by the RBI only amplify the risk of wagering against the rupee. Elsewhere, the dollar index was steady at 98.6, while Asian currencies were mostly lower on the day.
