Rupee’s plunging volatility leaves investors guessing RBI moves
Even in a year when currency volatility decreases around the world, the decline in volatility in Indian rupees Traders from London to Singapore are asking when the central bank will loosen its iron grip.
The one-month rupee implied volatility against the dollar crashed to its lowest level since 2005 in June, prompting inquiries from investors in Citigroup Inc.’s roadshows. and ICICI Securities Primary Dealership Ltd to gauge the path ahead for the Indian currency. This is largely due to the huge role of Reserve Bank of India In keeping the rupee in a narrow range.
The Reserve Bank of India has added $32 billion in reserves already this year as it absorbed foreign inflows to keep the currency stable, while the dollar forward book also rose by about $10 billion in the first four months of the year. The central bank’s efforts to stabilize the rupee may aim to boost its attractiveness as an international business currency, according to Citigroup.
Abhishek Upadhyay, Economist at ICICI Securities Primary Dealership, said back from a recent client trip to Singapore and Kuala Lumpur. “It is clear that traders want higher trading volumes, even as investors continue to wait longer for the RBI to dump the rupee.”
The historical volatility of the rupee is the lowest in Asia over the past year, with the exception of the dollar-pegged Hong Kong dollar. This has coincided with a global decline in asset volatility. The JPMorgan Global Forex Volatility Index came in at 8.2%, down from this year’s high of 11.6% in March.
The rupiah’s gains have been muted this year despite more than $12 billion in inflows into state stocks, while high-yielding rival Indonesia is up about 3 percent with only a small part of those inflows. RBI confirmed that it is stepping in to keep the undue volatility of the rupee under control.
Investors from M&G Investments Inc. to T.
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“India’s balance of payments is back in surplus,” said Guan Yi Lu, head of Asia Pacific fixed income at M&G. “India is also benefiting from moving global supply chains. We see an upward potential for India’s growth outlook in the coming years, and we see it as positive for the rupee.”
The stability of the rupee prompted analysts and investors to discuss the RBI’s currency strategy, and its pros and cons.
“The Reserve Bank of India may attribute as much weight to currency stability as it does to price stability and financial stability in an unstable global environment,” Samiran Chakraborty, Indian economist at Citigroup, wrote in a note.
However, the dangers of low volatility cannot be overstated. Historically, long periods of extraordinary stability in the rupee have been followed by sharp depreciation of the currency as periods of calm can lead to complacency, according to Citigroup.
“A negative side effect of low volatility is often inadequate hedging by firms which could lead to unwanted currency exposure in the event of a sharp downward move in the rupee,” said Rajeev De Melo, global macro portfolio manager at Gama Asset Management in Geneva. .
“Foreign investors adjust their positions based on volatility and can overly increase their positions in rupees.”