What’s going on here?
The Indian rupee forwards market saw a dramatic dip, with trading volumes among banks dropping 36% in Q2 2024 compared to the previous quarter, according to the Clearing Corporation of India Ltd (CCIL).
What does this mean?
Companies typically use the dollar-rupee forward premium market to hedge foreign currency transactions, with banks like Shinhan Bank India actively managing these risks. But banks are pulling back due to limited arbitrage opportunities, a rangebound rupee, and low volatility in the market. A vice president at Shinhan Bank India highlighted that the lack of price movement and reduced client flows make the market unattractive for heavy trading. For example, the 1-year implied yield on dollar-rupee forwards stuck to a narrow 15-basis points range in Q2 2024, significantly down from a 40-bps range in earlier quarters. This has intensified banks’ risk appetite, leading them to handle client flows internally rather than engaging in broader market trading.
Why should I care?
For markets: Calm before the storm.
The constrained market action has led to narrower bid-offer spreads and sporadic trading pockets throughout the day. Market participants are taking larger positions during these active periods, suggesting a buildup to a significant market move. A swap trader hinted that the current low volatility could set the stage for a breakout that might affect the dollar-rupee spot rate.
The bigger picture: Fed’s next move could shake things up.
Trading activity might spike when the Federal Reserve starts cutting interest rates, which investors anticipate might happen by September. This potential easing of rates could influence market dynamics, leading to increased volatility and rejuvenating trading volumes in the rupee forwards market.
