The central bank is said to have intervened through some state-run banks that brought down the cost of covering currency exposure across maturities, traders said.
The RBI did not immediately reply to ET’s queries.
The premium on one-day forwards contract, known as Cash Tom in market parlance, settled at 7.41% Tuesday, compared with 28.95% earlier in the morning trade, show data from the Clearing Corporation of India. The gauge traded at 19.78% a day earlier.
“The central bank likely intervened to help escape an uncertainty in the currency market,” said Anindya Banerjee, a currency analyst at Kotak Securities. “If it did not intervene, there would have been more arbitrage trade, triggering volatility.”
The rupee gained 0.09 percent to close at 73.86 a dollar Tuesday when emerging markets including Japan and China were shut for a local holiday.
Onshore forward premiums shot up Monday by up to 360 basis points.
“RBI was worried about the elevated premium and asked some nationalised banks to get into the buy-sale of swap deals, pulling down the elevated premium,” said a dealer at a large bank.
In market parlance, those state-run banks turned ‘receivers’, buying dollars on behalf of the central banks only with a promise that they would return to the seller at a future contract maturing date after deducting the premium. If there are more “receivers” in the market, forward premiums are likely to come down.
The premium on a near one-month onshore forwards contract yielded 9.32 percent, about 44 basis points lower than the peak of Monday. In forward contracts maturing within the next 12 months, the extent of the premium decline was much less.
Up to September maturities, premiums broadly fell by about four-eight basis points, dealers said.
“Stable forex funding costs should generally help the RBI’s objective of achieving stability in the exchange rate,” said Ashhish Vaidya, treasury head at DBS Bank India. “Sustained elevated forwards premium could have well triggered volatility in the spot rupee-dollar rate.”
While the record high foreign exchange cover provides a buffer against a collapse in the value of the currency, it is to be seen how long such interventions can prevent the currency from experiencing wild swings. Mint Road has forex reserves of $584 billion.
Companies with overseas liabilities are not showing any interest cover their currency risk unless those wrinkles are ironed out. Instead some companies with immediate need to cover risk are seen booking one-week contracts at the most.