By Nimesh Vora and Jaspreet Kalra
MUMBAI (Reuters) – The heavy demand for the U.S. dollar in the non-deliverable forward (NDF) market had widened the arbitrage with the Indian onshore market, putting more strain on the rupee and sending it just shy of another lifetime low, traders said on Thursday.
The rupee declined to 85.7900 per U.S. dollar, not far off the all-time low of 85.8075 hit last Friday. It opened on a weaker note, at 85.7025, and has been under pressure since.
The rupee hit record lows regularly in December due to the run-up in the dollar index and U.S. Treasuries. The dip in India’s growth rate, a wider trade deficit and a slowdown in capital inflows have compounded its woes.
Amid this, speculators have been lapping up the dollar in the NDF market vis-à-vis the rupee, which has spurred arbitrage opportunities with the onshore over-the-counter (OTC) markets.
For instance, the one-month dollar/rupee NDF rate on Thursday was 4-6 paisa higher than the onshore OTC rate, per traders.
“It’s not only the 1-month, there is good arbitrage across maturities,” said the head of FX and rates trading at a private sector bank, while pointing out that the difference between the two rates had widened on Thursday.
“With the New Year kicking off, it would seem new money is going to work (in the NDF market).”
To exploit the arbitrage, market participants buy dollar/rupee in the onshore OTC — which raises the pair’s value in that market — and sell it in the NDF market.
“Unless we see a major change in the outlook of the dollar, you can’t expect NDF to let up” and the rupee will “labour”, a currency trader at a bank said.
The dollar index, hovering at its highest in more than two years, is currently well supported amid expectations that U.S. President Donald Trump will raise trade tariffs.
(Reporting by Nimesh Vora; Editing by Savio D’Souza)
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