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Analysts Predict Increase in Dollar/Rupee Premiums as US-India Interest Rate Gap Expected to Grow

Indian forex traders are predicting an increase in the dollar/rupee forward premiums as U.S. interest rates are expected to decrease this year. The USD/INR 1-year implied yield is anticipated to reach 3% levels in the fiscal year 2024, up from the current 2.40%, according to market participants.

The expected widening of forward premiums, which is linked to the U.S. and India interest rate differentials, is due to the Federal Reserve’s gradual rate easing and the Reserve Bank of India’s decision to keep rates steady, according to economists. The Fed futures predict that the central bank will lower rates by about 60 basis points (bps) from its peak this year. The market is currently anticipating two to three rate cuts by December.

The flat yield curve is expected to steepen as the fiscal year progresses due to the Fed rate cuts, which have improved the outlook for inflows into Indian markets. At some point, the RBI could step in to limit the rupee’s appreciation, thereby providing another reason to pay forwards, according to traders.

Traders also indicate that the RBI has been buying dollars to shore up its reserves when the rupee rallied. To avoid the impact of its spot intervention on rupee liquidity, the central bank has been paying or doing sell/buy swaps in the forwards market, pushing premiums higher.

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