The forward premium -a measure of the expected movement for the local currency in its pairing against the dollar -declined about 14 paise in the past two days to Rs 2.81 for the one-year maturity contract after the central bank reduced the benchmark policy rate by a quarter-percentage point Wednesday.
Forward premium is the spread or gap between the prevailing exchange rate and the higher level used in forward currency exchange deals.
"Exporters are selling in a big way after the RBI's interest rate cut," said Anindya Banerjee, analyst at Kotak Securities. "With the latest rupee rise, their gains from the forwards premium are now capped as they realise lesser value on their existing contracts." "Many exporters are rushing to book fresh forwards contracts to cover their future receivables," he said.
The rupee Thursday hit a fresh two-year high, closing at 63.68 a dollar, a tad stronger than a day earlier. During the day, it reached as high as 63.56. A stronger rupee coupled with falling forwards premium yield lower value realisation for exporters who book forwards contracts.
Similarly, a weaker rupee coupled with rising premium is good news for companies with offshore re ceivables.For instance, an exporter who booked one-year contract two days ago would have taken the exchange rate at about 67.06 (spot exchange rate plus premium) compared with 66.50 now. This means, an ex porter locking in forwards now have to fork out more dollars.
"Looking at the huge overseas inflows, exporters need to cover at least three-fourths of their confirmed receivables," said KN Dey, managing partner, United Financial Consultants, a Mumbai-based forex firm. "The rupee looks to be on a rising path. A further appreciation may hur t India's export competitiveness.
Whenever the interest rate differential between the US and India narrows, the (rupee-dollar) forwards pre mium dips."
Forward transactions in the forex market are either at a premium or a discount to the rupee's spot rate. Typically, the maturity dates of forward transactions are in the range of one month to a year.