Back to Career News

RBI’s currency intervention ends up hurting rupee carry trade

October 19, 2022

RBI’s currency intervention ends up hurting rupee carry trade
The Reserve Bank of India’s currency intervention is making the rupee 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 rupee typically a reflection of interest rate differentials with the US to the lowest since 2011, eroding its appeal.

The sharp decline in the implied yields, known as the dollar-rupee forward premiums, comes about partly due to how the RBI is taking its intervention efforts into the forward markets to ensure rupee liquidity in the banking system. The central bank 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 RBI 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 Forex Ltd.

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

The central bank 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 currency. The implied yields 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 RBI.

Important Links:

Recommended for you ...

Axis Bank and Mastercard Launch Premium Credit Card for Small Business Owners
Axis Bank and Mastercard Launch Premium Credit Card for Small Business Owners

September 26, 2024

Banks Report Over 15% Growth in New Credit Card Additions: RBI Data
Banks Report Over 15% Growth in New Credit Card Additions: RBI Data

September 26, 2024

National Company Law Tribunal (NCLT) Approves Merger of IDFC and IDFC First Bank
National Company Law Tribunal (NCLT) Approves Merger of IDFC and IDFC First Bank

September 25, 2024

Chat on WhatsApp