Perspectives on Forward Premia in India Forex Market: A Study of USD/INR

The study is an attempt to understand dynamics of USD/INR forward market. For this study, we have collected primary information from the market practitioners with the help of a structured mailed questionnaire. It is observed that forward contracts play an important role in addressing the exchange rate risk. It is observed that qualitative attributes like market sentiments, expectations, political stability and financial news play a vital role in determination of forward premia apart from quantitative factors viz., Interest Rate Differential, Crude Price, Net Intervention of RBI, lagged values of forward premia and Turnover in the foreign exchange market. It is also found that forwards and futures would continue to have their respective market shares in the Indian foreign exchange market since both of them have unique features in minimizing the exchange rate risk. Forwards and futures would continue to have their respective market shares in the Indian foreign exchange market since both of them have unique features in minimizing the exchange rate risk. It is also evident from the responses that international oil price has a marked impact on the movement of forward premia due to India’s heavy reliance on oil imports. Further, the survey results reveal that multi-currency regime and forward market would co-exist in future. There is a unanimous view that RBI played a proactive role in bringing down volatility in the Indian markets during the financial crises in the past.