Increase in rupee volatility in Dec shows little signs of abating

Implied volatility over 3-month, 6-month period remains elevated

The expected volatility of the rupee, which had spiked this month, shows little sign of abating even as the currency hits new all-time lows.

 

The three-month and six-month implied volatility of the rupee both shot up to their highest in nearly a year in early December (chart 1). 

 

The sharp fall in the rupee in recent times has seen levels remain elevated.

 

Implied volatility is broadly the expected change in the rupee value over a given period.

 

The six-month implied volatility figure of over 4 per cent would suggest an equivalent change in rupee value over this period.

 

The outlook for volatility remains high, according to analysts, even as the rupee is expected to depreciate further.

 

“Volatility is going to be higher,” said Abhishek Goenka, founder and chief executive officer, IFA Global.

 

The impact of United States President-elect Donald Trump’s expected policies on countries including India has had affected a number of currencies.

 

Expectations of possible shock-changes on issues such as tariffs from the new US President are a break from the relative stability seen earlier.

 

The rupee has been under pressure, but things may well turn around if the policies do not turn out to be as disruptive as feared. The Reserve Bank of India is likely to allow the rupee to weaken slowly as before, according to Goenka. 

 

“The broad policy of calibrated depreciation stays,” he said.

 

Anil Bhansali, head, treasury, Finrex Treasury Advisors, said: “Volatility will keep moving up as the rupee weakens.”

 

He pointed out the rupee had fallen as much in the past three months as it had in the whole of 2023-24 (FY24) and volatility tended to spike when the currency depreciated.

 

After volatility had reached a multi-year low, it was expected there would be some increase, he said. 

 

The Reserve Bank of India’s (RBI’s) intervention to support the rupee by selling dollars has come down, suggested Bhansali, adding that the broad direction of the Indian currency continued to point towards depreciation.  

 

“I think RBI selling has come down, they (RBI) would buy at lower levels,” he said. 

 

The rupee has been among the best-performing of the emerging-market currencies both on a year-to-date basis as well as in recent weeks.

 

It fell around 2 per cent year-to-date compared to double-digit declines in peer currencies like the Brazilian real and the Russian ruble (chart 2). It has continued to see limited declines in the last fortnight, according to the data from December 10 onwards. 

 

The new Reserve Bank of India governor took charge on December 11. From the sample of key emerging-market countries, the currencies of Vietnam, Russia and Mexico have done relatively well since.