Photographer: Dhiraj Singh/Bloomberg

Options Traders Are Bullish on the Rupee

Updated on
  • Indian economy better placed to face selloff, Mizuho Bank says
  • Smaller deficit, record reserves, low inflation offer support

Options traders are bullish on the rupee, betting that the Indian currency is better prepared to endure a selloff when major central banks start paring stimulus.

With the current account gap narrowing significantly, inflation at a record low and reserves at all-time high, India is less exposed to the risk of outflows when authorities raise rates, according to Mizuho Bank Ltd. That’s a contrast from 2013, when the Federal Reserve’s hint of an end to stimulus sent the rupee tumbling along with other emerging-market currencies.

“India is in a very different place, and is far more fortified,” Vishnu Varathan, Singapore-based head of economics and strategy at Mizuho, said in an interview. The currency may “stand out as a lower beta” bet in Asia, he said.

The optimism is reflected in the derivatives market, where one-month options conferring the right to sell the rupee cost 72 basis points more than those to buy. That’s down from 116 on July 5 that was the highest since December. The so-called risk-reversal rate has dropped 25 basis points this month, the most since March, and compares with a decline of four basis points for China’s yuan and 12 for South Korea’s won.

Rand Merchant Bank, the rupee’s most accurate forecaster in Bloomberg’s quarterly rankings, raised its forecast to 64 per dollar by year-end. Mizuho predicts the currency to climb to 63 by the second half of next year, after posting its first annual gain in seven years in 2017. The rupee strengthened 0.2 percent to 64.3225 per dollar on Friday.

India’s currency is up 5.6 percent against the dollar this year and its one-month implied volatility this week slumped to the lowest since February 2008, as Prime Minister Narendra Modi’s policies lure global funds. Overseas holdings of Indian bonds and stocks have risen by about $29 billion rupees this year.

“For an emerging-market currency, the risk reversal on the rupee can still be considered low,” said John Cairns, Johannesburg-based strategist at Rand Merchant Bank. The market isn’t anticipating “huge risks of rupee weakness,” he said.

Yet, gains from current levels may be limited as foreign inflows into stocks slow amid rich valuations, according to Standard Chartered Plc. The rupee may trade at 64 by September-end, Divya Devesh, a Singapore-based Asia foreign-exchange strategist wrote in a note Wednesday.

Read: HSBC Sees Rupee Drop as Foreigners Put Brakes on India Inflows

For now though, the gush of foreign portfolio flows and burgeoning currency reserves is keeping the bears away.

Deutsche Bank AG last week revised its year-end rupee prediction to 66 from 67.50 earlier, saying the previous forecast was based on the dollar climbing significantly against most of its Group-of-10 peers in the second-half of the year.

“It seems now that the strong USD cycle of the last 6 years has topped out,” Kaushik Das, the bank’s chief India economist, wrote in a report.

— With assistance by David Finnerty

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