Indian rupee forward premiums have climbed to their highest levels in three years, driven by year-end adjustments, excess U.S. dollar liquidity, and heightened demand for hedging in the non-deliverable forward (NDF) market. The surge comes as traders unwind positions and exporters and importers seek protection against currency volatility.

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Forward Premiums Reach Multi-Year Peaks

The one-year annualized U.S. dollar/Indian rupee (USD/INR) forward premium rose to 2.84% on Friday, marking its highest level since October 2022. In December alone, the premium has jumped over 60 basis points. This rise follows repeated declines in the rupee, which prompted both increased hedging activity and speculative trading.

Despite a partial recovery of the rupee, forward premiums have continued to climb over the past three trading sessions. Concerns over excess dollar liquidity and end-of-year financial adjustments have kept premiums elevated. Last-day December and first-day January swap points reached 14 paisa, underscoring the seasonal pressures in the currency market.

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Rupee Recovery and RBI Intervention

On Friday, the rupee recovered to 90 per U.S. dollar after hitting an all-time low of 91.0750 earlier in the week. The rebound was largely attributed to intervention by the Reserve Bank of India (RBI). However, despite the spot market recovery, forward premiums remain elevated due to year-end regulatory constraints and liquidity management practices.

Banks are limited in placing dollar deposits to manage liquidity at the turn of the year and quarter. To navigate exposure limits, they use dollar-rupee sell/buy swaps, a dynamic that has historically led to spikes in swap points at the end of each calendar year.

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Impact on Hedging Costs

Rising forward premiums increase hedging costs for importers, making it more expensive to protect against rupee weakness. Conversely, exporters benefit by hedging future receivables at higher forward rates. Short-term maturities are most affected, with one-month forward points reaching 40 paisa—the highest since March 2022.

“There is a dollar glut as RBI’s selling in the spot market has not been fully sterilized,” said Abhishek Goenka, CEO of FX advisory firm IFA Global. Analysts also pointed to the unwinding of received positions and continued offshore hedging as contributing factors to the elevated premiums.

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Outlook for the USD/INR Market

Analysts expect that forward premiums may remain elevated in the near term due to continued end-of-year adjustments, liquidity management, and offshore hedging activity. Importers will need to navigate higher hedging costs, while exporters may take advantage of favorable forward rates to lock in USD receivables.

The dynamics underscore the importance of proactive currency risk management for companies engaged in cross-border trade with India, especially at key calendar milestones.