Rise in overnight swap rate, lower US bond yields boost forward premiums
The dollar-rupee overnight swap rate rose to 0.38 paisa on Wednesday, lifting near-tenor forward premiums to a one-month high and supporting long-term tenors as well, aided by a dip in the one-year U.S. Treasury yield.
The one-month forward premium advanced to 12.50 paisa, while the 1-year implied yield rose by 2 basis points to a three-week high of 2.05%. The 1-year U.S. Treasury yield was last at 4.08% after hitting a two-week low overnight.
Tighter rupee liquidity in the banking system pushed up the overnight swap rate, according to traders.
India's banking system liquidity is currently hovering near a seven-week low but it is expected to improve in next few days, which may help cool off near-tenor forward premiums.
On the far end, "there is limited appetite to run a paid position," a trader at a large private bank said, citing rising chances of the Federal Reserve holding interest rates steady for longer and growing expectations of a rate cut by the Reserve Bank of India in its August policy meeting.
Meanwhile, in the spot market, the rupee was nearly flat at 86.37 per U.S. dollar as of 12:15 p.m., wedged between positive cues from gains in most regional peers and routine dollar demand from local importers.
The dollar index was steady at 97.5, while the Chinese yuan strengthened to a three-week high, buoyed by fresh signs of easing trade tensions and a persistently stronger-than-expected guidance fix by the country's central bank.
U.S. and Chinese officials are slated to discuss an extension to the tariff deadline of August 1 for negotiating a trade deal.
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