How elections aid speculators in currency market
MUMBAI: The premium gap between overseas and local contracts on the Indian rupee may almost double for short-duration forward deals, as last week’s victory for the ruling party in crucial state elections fuels expectations of greater arbitrage opportunities for currency traders.
For offshore and onshore forwards contracts lasting between one and three months, the premium gap for the INR-USD pairing may rise to 10-15 paisa from 5-9 paisa now, dealers said.
The premium difference helps make money for traders when spread-betters, with bullish rupee outlook, short-sell the dollar against the rupee in the domestic forwards and buy the same unit from the overseas derivative market, known as non-deliverable forwards (NDF). Many companies and hedge funds are active participants in these trades, seeking to benefit from the arbitrage opportunities presented by mega-events, such as the latest polls.
“State election results will drive the rupee until the US Fed becomes the more dominant factor," said Anindya Banerjee, a currency analyst at Kotak Securities. "There is an arbitrage opportunity for speculators, who will play on the premium gap between NDF and domestic forwards.”
The results of the elections, which included choosing deputies to the assembly of the world’s biggest sub-national democracy of Uttar Pradesh, were announced Saturday. India’s currency markets have not opened since provincial elections were called, boosting the prospects of Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP).
In the past one month, the rupee gained 0.61% against the greenback. During the period, the Reserve Bank of India (RBI) was seen to intervene in the currency market through the state-owned banks that bought dollars. The RBI moved in to shore up reserves, a part of which was used earlier to check the rupee’s losses. Banerjee said that if speculators cause unusual movements in the pairing, the RBI may intervene again to stabilize the currency within a band.
India's foreign exchange reserves were at $364.01 billion on March 03, compared with $360.61 billion during mid- December last year, show RBI data. It was about $350 billion a year ago.
Separately, foreign portfolio investors have invested Rs 22,654 crore in domestic equities and debt securities this calendar year, compared with Rs 2,863 crore in the first three months of the previous year, show data from depository NSDL.
"Election results have clearly lifted the market sentiment,” said Navin Raghuvanshi, a senior currency trader at DCB Bank. “This in turn, is likely to trigger speculative bets in the currency market. While banks are not allowed to do so, some punters will turn active when the market opens on Tuesday, expanding the premium spread.”
The referral spot rate in the NDF market has strengthened to 66.15 a dollar on Monday from about 66.55 last week. The rupee rose 0.15% to 66.61 a dollar on Friday in the domestic spot market.
The local unit may gain further when it opens for trading Tuesday after an extended weekend. But the impact may be short-lived, at least for the moment, as global currency markets track Wednesday’s scheduled US Federal Reserve meeting on fund rates.
“The currency would soon digest the domestic event, and the US Fed might become the more important factor," Banerjee said.
For offshore and onshore forwards contracts lasting between one and three months, the premium gap for the INR-USD pairing may rise to 10-15 paisa from 5-9 paisa now, dealers said.
The premium difference helps make money for traders when spread-betters, with bullish rupee outlook, short-sell the dollar against the rupee in the domestic forwards and buy the same unit from the overseas derivative market, known as non-deliverable forwards (NDF). Many companies and hedge funds are active participants in these trades, seeking to benefit from the arbitrage opportunities presented by mega-events, such as the latest polls.
“State election results will drive the rupee until the US Fed becomes the more dominant factor," said Anindya Banerjee, a currency analyst at Kotak Securities. "There is an arbitrage opportunity for speculators, who will play on the premium gap between NDF and domestic forwards.”
The results of the elections, which included choosing deputies to the assembly of the world’s biggest sub-national democracy of Uttar Pradesh, were announced Saturday. India’s currency markets have not opened since provincial elections were called, boosting the prospects of Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP).
In the past one month, the rupee gained 0.61% against the greenback. During the period, the Reserve Bank of India (RBI) was seen to intervene in the currency market through the state-owned banks that bought dollars. The RBI moved in to shore up reserves, a part of which was used earlier to check the rupee’s losses. Banerjee said that if speculators cause unusual movements in the pairing, the RBI may intervene again to stabilize the currency within a band.
India's foreign exchange reserves were at $364.01 billion on March 03, compared with $360.61 billion during mid- December last year, show RBI data. It was about $350 billion a year ago.
Separately, foreign portfolio investors have invested Rs 22,654 crore in domestic equities and debt securities this calendar year, compared with Rs 2,863 crore in the first three months of the previous year, show data from depository NSDL.
"Election results have clearly lifted the market sentiment,” said Navin Raghuvanshi, a senior currency trader at DCB Bank. “This in turn, is likely to trigger speculative bets in the currency market. While banks are not allowed to do so, some punters will turn active when the market opens on Tuesday, expanding the premium spread.”
The referral spot rate in the NDF market has strengthened to 66.15 a dollar on Monday from about 66.55 last week. The rupee rose 0.15% to 66.61 a dollar on Friday in the domestic spot market.
The local unit may gain further when it opens for trading Tuesday after an extended weekend. But the impact may be short-lived, at least for the moment, as global currency markets track Wednesday’s scheduled US Federal Reserve meeting on fund rates.
“The currency would soon digest the domestic event, and the US Fed might become the more important factor," Banerjee said.
