RBI continues to intervene in FX forwards to prevent a rupee shortage in money markets triggered by dollar sales in spot markets.
Data last week showed RBI sold $482 million in spot markets in May, while its total outstanding forward dollar sales tripled to $10.31 billion from $3.45 billion in April.
That intervention has rippled into the onshore implied rupee yield curve: the spread between the one-year rate is trading as much as 100 pips above the one-month. In late May the negative spread had been as high as 110 pips.
The steep inversion of the offshore forward curve indicates RBI continues its interventions at the longer end of the curve, while short-term hedging by importers and foreign investors, and lack of dollar demand also contribute.
ICICI Bank says some of that severe money market dislocations is improving gradually thanks to a sudden rise in rupee liquidity in a cash-starved money markets and to the rupee recovery.