Rupee Options Bears Retreat as Rajan Puts India Reserves to Work

Updated on
  • SocGen's Agrawal sees rupee outperforming Asian peers
  • Risk reversals fall from highest in almost two years

Options traders are paring bearish rupee bets on signs Indian central bank Governor Raghuram Rajan will deploy the war chest of foreign exchange he built up over the past two years.

Rajan said on Aug. 24 that India will use its reserves to stem rupee swings after China’s shock yuan devaluation triggered a sell-off of emerging-market assets. India’s currency hoard has fallen $3.4 billion from $355 billion on Aug. 21, a sign the Reserve Bank of India is already intervening to keep the exchange rate stable as the U.S. Federal Reserve considers raising borrowing costs.

“The rupee will outperform Asian currencies over the medium term,” said Amit Agrawal, a strategist at Societe Generale SA in Bengaluru. “Ample reserves give India enough ammunition to counter any heightened bout of volatility.”

One-month options offering the right to sell the rupee cost 153 basis points more than those to buy, down from 223 on Aug. 27, the highest since November 2013. The so-called risk-reversal rate dropped 52 basis points last week, the most since February last year. The currency, which traded at 66.33 a dollar in Mumbai on Wednesday, will appreciate to 65.75 by March, according to the median estimate in a Bloomberg survey of analysts.

The rupee plunged 3.5 percent in August, the most in two years, as global funds sold a net $2.6 billion of Indian shares in the biggest monthly outflow since 2008. Malaysia’s ringgit sank 8.6 percent last month while Indonesia’s rupiah depreciated 3.8 percent. The Indian currency rose 0.3 percent on Wednesday and has climbed 0.2 percent so far in September.

Rajan, a former chief economist at the International Monetary Fund, said Aug. 24 that India is in a “good position” compared with other emerging markets, citing reasons such as moderating inflation, low short-term currency liabilities and a narrowing fiscal deficit. The central bank had been buying dollars to build reserves. It purchased a net $565 million in the spot market in June alone, taking total purchases in 2015 to $36 billion, according to data compiled by Bloomberg.

“We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee,” Rajan told a conference in Mumbai. “Once market volatility settles down, India should emerge once again as an investment destination of choice.”

The rupee’s three-month implied volatility, a gauge of expected swings used to price options, dropped to 8.08 percent on Wednesday from as high as 10.08 percent in August, signaling reduced potential for losses.

The S&P BSE Sensex index of stocks, India’s benchmark equity gauge, slumped to a 15-month low on Monday as the prospect of higher U.S. interest rates and a deepening economic slowdown in China curbed demand for riskier assets.

Official data last week showed India’s economy expanded 7 percent last quarter, putting it on par with China as the world’s fastest-growing major economy. The rate of growth though was slower than 7.5 percent in the three months ended March 31, and below the median estimate of 7.4 percent in a Bloomberg survey.

More Intervention

SocGen’s Agrawal expects the central bank to continue intervening in the spot and forwards markets to limit volatility if the pressure on developing-nation currencies remains in place.

ING Groep NV, the top rupee forecaster in Bloomberg’s quarterly rankings, said last month that the currency will outperform Asian peers as India is less exposed to the slowdown in China. Exports to China comprise less than 10 percent of the total overseas shipments from Asia’s third-largest economy.

The past year’s 50 percent slide in Brent crude prices helped ease consumer inflation to an eight-month low in July. It also contributed to narrowing the net oil-importing nation’s current-account deficit to a seven-year low of $27.5 billion in the year ended March 31.

The rupee will earn 7.2 percent, including interest, by mid-2016, the best total return in the region, according to Bloomberg surveys of strategists.

“India is relatively better placed in Asia to withstand Fed hikes and is among the best positioned in the region to benefit from lower oil prices,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “We expect the rupee to be one of the outperformers.”