1 Year forwards to move lower towards 250p from 315p?

The first chart below has 2 panels. The upper panel’s magenta line is the interest rate differential between India 1 year treasury yields and US 1 year treasuries. The orange lie is annualised 1 year USDINR forward. The second panel is the green line which is USDINR.

In the period when USDINR was stable to appreciating, 2004-2008 and 2009 to 2012, the USDINR forward rate was ~2% lower than the interest rate differential. This was due to the excessive receive side appetite of the market, which was a manifestation of the stable to appreciating INR view in the market. The idea was to make good of the excess carry in INR as spot risk seemed low.

The view on INR seems to be changing from that of gradual depreciation to stable or mild depreciation at max. This should facilitate carry trades and bring back long term USDINR sellers in the market. This should in turn increase the receive side appetite in the market going forward.

The second chart below is USDINR 1 year actual forward points. From 20^th March to May end every year since 2009 the forward points have moved lower. I can only observe this and cannot rationalize the reason.

RBI is expected to stay on hold for the year while the US FED is expected to hike twice more at least. This should also bring down forwards further.

I would receive USDINR 1 year forwards at the current levels of 315 with stop at weekly close above 333, for a 1% fall in annualized terms to 250p. Given that the earlier RBI regime had a very hands off approach to forwards market as compared to post Dr. Rajan era, therefore the fall could be lesser, but still the carry and whatever fall we get makes it a good trade.