Like any responsible central bank, the Reserve Bank of India (RBI) holds its cards close to its chest. If the markets know what the central bank intends to do and its targets, this sets up expectations. Those could be counter-productive.
For instance, traders spent years profitably playing what was known as the 'Greenspan put'. Every time the US market fell a certain amount, Alan Greenspan, then the chairman of the US Federal Reserve, would ease monetary policy. The flood of new money would push up asset prices again. Eventually, this caused the subprime bubble and it certainly contributed to the internet boom-bust cycle. Since Quantitative Easing started, it's become the 'Bernanke put'.
The trading patterns of the past two or three weeks suggest a rupee-dollar benchmark level where the RBI takes action. It must be emphasised that this pattern is being extrapolated on very little data and could well be spurious.
It seems RBI will intervene in some fashion or another if the rupee falls below 60.50 against the dollar. According to anecdotes, it has asked oil public sector units (PSUs) to hold off on dollar purchases, as well as "requesting" banks not to short the rupee, in its attempts to talk the rupee up. It has also sold dollar, when the rupee has moved below about 60.75. Conversely, if the dollar is trending below 59.5 or so, the RBI seems relatively comfortable.
Guesswork suggests RBI finds a band of approximately 59-60.25 acceptable. Foreign institutional investors (FIIs), which use highly sophisticated algorithms, would have a better idea of the exact levels. Anyhow, there seems a trigger point where RBI will intervene. If there is indeed such a pattern of RBI action and the FIIs have deciphered it, they could also start acting upon the 'RBI put'. FIIs have actually been net equity buyers in the past two sessions, albeit in small quantities.
Was the hypothetical RBI trigger point hit on Friday? The rupee-dollar contract closed out at 61.10 and the RBI reference rate on Saturday was 60.80, with August rupee-dollar futures quotes hitting the 61.45 range on Friday. This is well above the trigger levels for RBI intervention, going by past expectations. The dollar fell much more sharply on Friday after the stock market closed.
The weak rupee might mean the market opens low on Monday, unless East Asia is strong in the morning and that pulls Indian sentiment up. We could expect some RBI action on Monday, if the dollar opens strong, and the stockmarket opens low, below Nifty 5,650. What RBI will do is conjecture. It could sell some dollars, or try to talk the rupee up again.
Without RBI intervention, the trend is likely to be one-way - that is, down. Any RBI intervention could result in big swings, with moves in both directions. Friday's session saw Nifty 5,650-5,750 movements. A low opening could mean support down till 5,565 being tested. Intervention could mean a pullback till 5,750-plus.
The first session, or the first two sessions of the week, might see the Nifty moving anywhere between 5,550 and 5,750 and, perhaps, further still to 5,810 or 5,500. The market seems braced for this, with high premiums on the 5,800c (78) and the 5,500p (56). Hedging with a strangle is expensive - the two long positions would, taken together, break even only outside 5,365 or 5,935.
Taking a view, the market seems more likely to travel down than up. A moderate risk-taker would buy the 5,500p or take a bearspread of long 5,500p (56) and short 5,400p (36), for a total cost of 20 and a potential return of 80. If you prefer futures positions, set stop-losses at 5,775 (short futures) and 5,590 (long futures). Watch the dollar like a hawk. If RBI does intervene, the impact on the stock market will be immediate.
