India rupee forward premiums signal bets of impending RBI FX swap, bankers say

By Nimesh VoraMUMBAI, March 13 (Reuters) - Indian rupee forward premiums dropped further on Friday on bets that the Reserve Bank of India may conduct a foreign exchange swap after a sizeable intervention in the currency market, seven bankers said.They said the RBI may opt to conduct a three-year $10 billion dollar/rupee buy-sell swap. One banker said the size and tenor reflect the central bank’s preference in the past for swaps of similar magnitude and maturity.The RBI has been intervening in the foreign exchange market to support the rupee, which has been under persistent pressure since the Middle East war pushed oil prices higher. Bankers said the intervention has spanned the spot market, non-deliverable forwards and futures.The rupee fell to an all-time low of 92.4250 to the U.S. dollar on Friday. It has lost about 1.5% since the war broke out on February 28.Spot dollar sales drain rupee liquidity from the banking system, and the scale of the intervention has fuelled speculation about a possible swap."The RBI has partly diluted the liquidity impact of its spot intervention by conducting swaps, largely for the one-year tenor," one banker said."However, the scale of those swaps has been modest relative to the size of the intervention, leading to speculation about a larger, longer tenor operation."The RBI has already conducted two three-year $10 billion dollar/rupee swaps this year, in January and February.The bankers spoke on condition of anonymity since they are not authorised to speak to the media. The RBI did not respond to a Reuters request for comment.Bets on a swap being announced are reflected in market indicators.Forward points on the three-year dollar/rupee dropped from an intraday high of 8.58 rupees to 8.20 rupees on Thursday when speculation about the swap began. They fell further to 8.06 rupees on Friday.The drop in forward premiums comes despite the rupee trading near its lifetime low. The currency's weakness would normally underpin premiums due to higher hedging demand."The talk of a potential swap has triggered a round of position unwinding. A good portion of the market had been positioned the other way, so the rumours have led to cutting of the trades," an FX swap and spot trader at a large private sector bank said.The RBI has discussed a possible FX swap with his bank, he said, adding that in a jittery market, speculation tends to have a larger impact than warranted.He suggested there is less than a one in six chance of the speculated swap actually taking place. The head of trading at a large foreign bank was more sceptical, placing the odds at just 5% to 10%.Speculation around the swap has driven heavy activity in the forwards market. State-run, foreign banks and at least one large corporate treasury were active, with volumes unusually high well beyond regular market hours on Thursday, one banker said.(Reporting by Nimesh Vora; Editing by Ronojoy Mazumdar)