High forward premiums make hedging expensive for foreign investors as rupee hits 96.79
GS3Economy · S&T · Environment · Security· Monetary policy, RBI & banking· Prelims·
Currency hedging and exchange rate volatility: a key GS3 topic regarding FPI flows and monetary policy.
Why in news
The Reserve Bank of India (RBI) is reportedly shifting focus on forward market dollar sales to cool surging forward premiums as the rupee hit 96.79 against the dollar.
Background
The one-year dollar-rupee forward premium rose from 7.40% to 8.65% before retreating to 8.45%. The rupee closed at 96.79 against the dollar on Thursday, tracking rising fuel prices.
Facts for Prelims
- FactThe rupee closed at 96.79 against the dollar on Thursday.
- FactThe one-year dollar-rupee forward premium retreated to 8.45% after peaking at 8.65%.
- BodyThe Reserve Bank of India (RBI) manages the forward market to stabilize currency premiums.
Prelims practice question
With reference to the dollar-rupee forward market, consider the following statements:
- The rupee closed at 96.79 against the dollar.
- The one-year dollar-rupee forward premium retreated to 8.65% after peaking.
- The RBI is shifting focus away from forward market dollar sales.
Which of the statements given above is/are correct?
- (a)1 only
- (b)3 only
- (c)1 and 2 only
- (d)1, 2 and 3
Show answer
Answer: (a) 1 only — Statement 1 is correct. Statement 2 is incorrect: The premium retreated to 8.45% after peaking at 8.65%. Statement 3 is incorrect: The RBI is shifting focus on forward market dollar sales to cool surging premiums.
For Mains
Q. Discuss how high forward premiums and hedging costs impact the flow of Foreign Portfolio Investment (FPI) into Indian debt markets.
Dimensions to cover in your answer
- Inflow Deterrence: High hedging costs reduce the net attractiveness of rupee-denominated assets for overseas funds.
- Policy Trade-off: RBI's intervention to cool premiums may inadvertently increase costs for importers and borrowers.
- Export Dynamics: Higher premiums may incentivize exporters to sell dollars forward, affecting domestic liquidity.
Keywords: Forward Premium · Currency Hedging · Foreign Portfolio Investment · Monetary Policy · Exchange Rate Volatility
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This note is generated automatically from SatyaDheesh's news feed and mapped to the UPSC CSE syllabus. Check facts against the original report or PIB before using them in an answer.