Usd-rupee forward curve inverts on arbitrage bets
The one-month USD-INR forward rate is now higher than one- and twoyear forward rates, an anomaly brought on by arbitrageurs playing between the offshore and onshore markets.
The one-month forward rate is at 4.9 per cent, while the one-year is at 4.6 per cent. The 2-year forward is also flat at 4.60 per cent.
“Short-term forward yield is higher on account of arbitrage between offshore and onshore. In other words, higher offshore points are getting transmitted onshore,” said Abhishek Goenka, managing director at IFA Global.
The arbitrage opportunity arises because even as the onshore market closes by the evening, the offshore market remains functional round-the-clock. he bidding continues as usual there, which gets reflected in the onshore market when it opens the next day.
Currently, many players are utilising these arbitrage opportunities, even as currency dealers say this is temporary.
The rupee has come under pressure owing to unwinding of carry trades. As India’s interest rates remain low but the US' 10-year bond yields inches up to 1.6 per cent, the spread between the two is contracting. This has led to foreign investors cutting their positions on rupee. “It will be interesting to see whether the RBI rolls over its maturing long forward positions. If it does so, it would push forwards higher, thereby making carry attractive again and that too could ease pressure on the rupee,” Goenska said.