Forward premiums represent the cost of locking in a future exchange rate for the rupee. When companies want to hedge against the risk of the rupee weakening further, they buy dollars for delivery at a later date. Term premiums rise when the demand for hedging increases.
The rise in forward premiums further reflects the increasing demand for taking speculative positions against the rupee, the banker said. Higher premiums make such positions more expensive, but speculators’ willingness to pay signals a belief that rupee weakness may persist, they explained.
The speculative build-up comes at a time when pressure on the rupee has increased, especially after the Reserve Bank of India allowed the currency to slip past the heavily defended 88.80 level.
The rupee weakened to 89.9475 against the US dollar on Tuesday, down 0.4% on the day and marking a fresh all-time low. The currency is on track for its fifth consecutive session of losses.
The break from the 88.80 level “changed” the market’s tone, encouraging participants who were previously reluctant to bet against the central bank’s defense, said a Singapore-based portfolio manager at an Asia-focused hedge fund.
The term premiums are largely determined by the interest rate differential between the US and India.
Bankers noted that there has been no meaningful shift in policy expectations on either side in recent days, suggesting that the recent rise in premiums is not driven by interest rates but instead appears to reflect supply and demand dynamics.
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