Indian rupee forward premiums surge to 14-month high on bets of rapid Fed rate cuts

The Indian rupee forward premiums jumped on Monday as investors priced in a more aggressive Federal Reserve rate cut cycle amid worries of an economic slowdown.

The implied yields on the 1-year dollar/rupee forward premium (INRANPRM1Y=RR) jumped 14 basis points to 2.05%, the highest since May 2023. The 1-year implied yield has risen 40 bps since the start of June.

WHY IT'S IMPORTANT

Forward premiums and the spot price on dollar/rupee USDINR are among the main variables companies consider when making their hedging decisions.

Higher forward premiums combined with higher dollar/rupee spot rate make it more attractive for exporters to hedge their future dollar receivables. For importers, it is the other way round.

Extreme moves in forward premiums can at times affect the spot rate itself.

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CONTEXT

The dollar/rupee forward premiums reflect the interest rate differential between the U.S. and India. That differential is now expected to widen amid a fall in U.S. interest rates, pushing premiums higher.

Concerns the U.S. economy is slowing down have prompted bets the Federal Reserve will be cutting borrowing costs at a faster pace than was previously expected. Following last Friday's weak U.S. jobs report, investors expect the Fed to cut interest rates by 115 bps this year compared with less than 70 bps at the start of last week. (FEDWATCH)

WHAT'S NEXT

U.S. data, specially related to the labour market, will be the most important factor in whether the run higher in premiums will persist. The U.S. services PMI data is due on Monday. The employment subindex will receive special attention.

QUOTE

"To what extent the U.S. economy will slow down will decide the fate of premiums and the rupee," a treasury official at a bank said.