Indian two thousand rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Swings in India's Rupee Is Making It Difficult to Hedge Currency

(Bloomberg) -- The success of the Indian central bank’s currency-swap auctions is leading to exaggerated moves in the onshore forwards market, making it harder for companies to hedge their foreign-currency borrowings.

Tuesday’s $5 billion auction, which drew offers for more than three times the size, was covered by just five bids. Banks whose bids didn’t get accepted were left with excess dollars that sent the one-year annualized forward rate as high as 4.58 percent after the sale.

“Due to excess dollars in the system, forward premiums are staying more elevated than they should,” said Anindya Banerjee, a currency analyst at Kotak Securities Ltd. in Mumbai. The fair value of the one-year forward premium is 3.5 percent, he said.

Swings in India's Rupee Is Making It Difficult to Hedge Currency

The swap auction was the second in as many months. Under the arrangement, the RBI will buy dollars from banks for three years and offer them rupees in return. The swap will bulk up India’s foreign-exchange reserves while injecting cash into the financial system to ease a lingering cash crunch.

Even so, there are limited players for the three-year swap and the RBI doing large deals on a single day is spurring volatility, according to Samir Lodha, managing director and forex hedging strategist at QuantArt Market Solutions.

“While volatility is in general good for traders and speculators it is not easy for companies and risk managers to navigate it,” he said.

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