Dealers foresee intraday volatility in rupee due to taper tantrum

Rupee had risen rapidly last week of August, closing at 73 a dollar level on August 31, from 74.2 level on August 26 after Fed Chair Powell indicated he was in no hurry to raise rates

After appreciating in the interim, the Indian rupee is again inching towards 74 level, indicating that the two-way volatility will continue in the local currency in an environment of taper tantrum and risk off sentiment induced by the delta variant of Covid-19.

The rupee had rapidly appreciated in the last week of August. It strengthened to close at 73 a dollar level on August 31, from 74.2 level on August 26 after Federal Reserve Chairman Jerome Powell indicated he was not in a hurry to raise rates.

Rupee was appreciating even before the Fed Chair’s speech as dollars poured in due to initial public offerings. The Reserve Bank of India (RBI) did not want to accumulate these flows fearing taper tantrums after Fed speech, which never materialised.

The central bank has resumed accumulating the flows once again, currency dealers say. That has taken away the appreciation bias, even as the dollar has started strengthening and US yields are rising on safe haven concerns as the delta variant continues to ravage parts of the world.

This push and pull factors have given rise to intraday volatility in the exchange rate, but sharp one-way movement is largely ruled out, dealers say.

For example, on Thursday, the rupee traded in the range of 73.49-73.85, and closed at 73.51 levels. The same kind of intraday volatility can be expected in the coming days as well, say dealers, but it won’t be much of an issue. Outflow linked to dividend payout by Vedanta was also partially responsible for the intraday volatility. But back of the mind, there is a lingering concern if the rupee will see sudden depreciation as witnessed in July-August of 2013.

“In terms of impact on rupee, we believe the taper would not be as disruptive as in 2013. India's external position is much stronger now and therefore we have greater wherewithal to endure the taper. India is no longer among the fragile five nations,” said Abhishek Goenka, managing director and CEO of IFA Global.

Still, currency consultants are suggesting both their importer and exporter clients to cover their positions.

“Import payments for up to a month or two can still be covered fully for up to a month, and partially for 2-3 months’ tenor at dips below 73.50. Receivables can be covered partially up to 6 months at current levels; with 73.20/30 band as the risk limit for the unhedged part,” Mecklai Financials suggested its clients.

Therefore, there is no firm view on rupee levels yet. For example, Anindya Banerjee, deputy vice president, currency and interest derivatives at Kotak Securities guided that rupee could “operate within a range of 73.20 and 74.00 levels on spot.”