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RBI’s currency intervention ends up hurting rupee carry trade: Analysts

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The Reserve Bank of India’s intervention is making the less attractive for carry traders, analysts said.


Its intervention in the spot and forward markets have helped pushed the 12-month implied yields on the — typically a reflection of interest rate differentials with the US — to the lowest since 2011, eroding its appeal.


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The sharp decline in the implied yields, known as the dollar- forward premiums, comes about partly due to how the is taking its intervention efforts into the forward markets to ensure rupee in the banking system. The has spent some $24 billion in the current fiscal year supporting its currency, helping the rupee decline less than Asian peers.


“The important point for us is that we expect the will continue to adopt this strategy to manage liquidity, and we can see a further drop in premiums,” said Amit Pabari, managing director at CR Ltd.


The RBI’s intervention to support its works like this — it sells dollars in the spot market and buys rupee. On the settlement date, the enters into a second transaction to buy dollars to avoid depleting interbank of the rupee.


RBI’s Book


The then sells the greenback again for rupee in the forward markets to maintain the intervention effort, which leads to a compression of returns on India’s . The implied yields have dropped to as low as 2.45% on Monday from 4.67% at the start of the year, though that’s partly also due to rates differentials narrowing by 110 basis points as the Federal Reserve hikes quicker than the .


The RBI “has been sterilizing its spot sales through buy-sell swaps to avoid sucking out from the banking system, which is already teetering on the brink of turning into a deficit,” said Abhishek Goenka, chief executive officer at India Advisors Pvt. “Swapping its sales forward also prevents a draw-down of reserves.”


While the strategy limits a draw-down of reserves, it does impact the RBI’s outstanding forward-dollar book. That has plunged to around $20 billion as of August, from this year’s peak levels of about $66 billion in March, according to the central bank’s data.


The rupee fell to a record low of 82.72 to a dollar earlier this month, and is down 9.7% this year. That though compares with declines of around 12% in the Chinese yuan, Malaysian ringgit and Thai baht, while others like the Taiwanese dollar and the South Korean won have seen bigger drops.

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