Rupee volatility disappears, hedging dips

Part of the reason for the stable currency is active intervention by RBI

The volatility in the Indian rupee has all but vanished in the past few months, which, currency dealers say, is leading to a hubris among importers and companies with foreign currency exposure, who are increasingly keeping their positions unhedged. 

Part of the reason for the stable currency is active intervention by the Reserve Bank of India (RBI), say currency dealers. While the central bank has communicated in the past that it intervenes to iron out volatility, currency dealers say under the present dispensation, the central bank is nullifying the volatility to a large extent. 

For the past few weeks, the exchange rate has hardly inched by five paise. 

The rupee in the first three months has moved quite rapidly, but the RBI intervention has meant it is maintaining an extended stability for some time now.

“On the one hand, the RBI is buying dollar flows, breaking the strengthening bias of the rupee. On the other, the dollar strength itself is getting arrested by the improving outlook in the Eurozone and the UK,” said Soumyajit Niyogi, associate director at India Ratings & Research. 

“However, geopolitical stability will be critical for sustaining this stability,” Niyogi added.

In the absence of volatility, currency market activity shrinks, which may lead to imperfect price quotations to clients who need foreign exchange. Besides, the perceived stability can be deceiving. As companies drop their guards and keep their exposures unhedged, any sharp and sudden breakout can lead to massive losses in the books. 

“Historically, whenever there has been an extended calm in the exchange rates, the breakout has always been sharp and devastating for many,” said the head of financial markets at a private bank. 

The rupee in the recent past though, has moved fast. It has strengthened about 5.5 per cent in the past six months against the US dollar, against a general expectation it would depreciate gradually. At the start of the calendar year, the rupee was trading at 68.23 a dollar. On Thursday, the local currency closed at 64.43 a dollar.  While India’s positive macroeconomic fundamentals are in play, the huge global liquidity surplus is largely responsible for the strength in rupee. But it should not remain so. 

“This is a liquidity-driven strength and should correct once there is a pull-back. But it is difficult to predict when,” said Samir Lodha, managing director of QuantArt Markets Solutions, a risk management firm.

Even large information technology companies are not immune to the sudden rise in rupee. Tata Consultancy Services reported fall in its June quarter profit on the rupee’s strength. 

T S Bhasin, chairman of Engineering Export Promotion Council, said the negative impact of a strong currency on exports is “clearly visible in the form of shipments showing a negative growth, measured in rupee.” 

Ananth Narayan, managing director for Asean and South Asia at Standard Chartered Bank, termed this as “complacency”, while he pointed out that even some foreign portfolio investors are seen not keen on hedging. Hedging adds up to 

5-6 per cent of the cost and the bet seems to be that the rupee won’t depreciate by that much in a year.  Surely, some currency dealers say there is more room for the rupee to strengthen. For example, Satyajit Kanjilal, managing director of Forexserve sees the rupee strengthening to 60 a dollar by December. However, not all share this view. Narayan sees the rupee gradually depreciate in the coming days.