An unexpected rally in the Indian rupee to above 82 to the U.S. dollar was powered mostly by offshore market participants and helped the non-deliverable forward (NDF) and onshore rates to almost converge, traders said on Wednesday.
The rupee climbed to a more-than-one-month high of 81.5950 to the dollar on Wednesday, adding to its 0.7% surge in the previous session when it breached the key 82.20-82.00 levels. The rupee's jump took market participants by surprise, considering that the USD/INR had been holding a narrow range over the past several sessions.
The major reason for the USD/INR moving out of this range was dollar sales by offshore investors in NDF, said a trader at a large private sector bank.
Offshore investors possibly now have a less pessimistic view of the rupee on account of India's improving current account dynamics and the U.S. Federal Reserve's less hawkish outlook, a dealer at another private bank said.
The NDF and onshore spreads have shrunk with the improvement in the rupee's outlook.
The near-maturity rates on NDF and onshore are now almost at par while in the 1-year maturity, the spread – which reflects foreign investors' expectations and usually widens in times of crisis – has declined to about 10 paisa.
In October, when the rupee was hovering at a record low of about 83.30, the 1-year spread was more than 90 paisa.
