On Wednesday, the Indian rupee rose, defying the caution in Asian markets. Traders attributed the rise to the fading of bearish sentiment among options traders.
Local unit quoted at $88,00 to US$, up 0.12% on the day despite the rally of the dollar index, which reached 98.50, and the weakness among regional counterparts.
The currency dealers say that the market for rupee options no longer shows a strong downward bias.
After the rupee broke the 88-mark last Friday, the risk reversal for the one-month USD/INR has flattened.
The demand for derivatives to protect against future depreciation is lower.
A Reuters article quoted a FX derivatives dealer at a private bank as saying: “The slight skew which favoured dollar calls is gone, and it’s not surprising considering the price movement post-Friday breakout.”
Market absorbs record low
The rupee reached a new record low on Monday of 88.33, and traders described the movement as calm and orderly.
The currency was trading in a relatively stable pattern on Tuesday. It briefly rose to 87.85, before reversing course. On Wednesday, it hovered around 88.
Fears of US trade sanctions and foreign funds outflows were the main reasons for last week’s breach.
The mood deteriorated after US President Donald Trump, on August 27, imposed an imposing 50% tariff on Indian exports — divided between the general duties and additional duties.
Analysts have suggested that the best policy may be to accept a rupee weakening.
A forex analyst at The Indian Express said that, given the tariffs imposed by the US on India, it is possible to think that the slight depreciation in the rupee would help the exporters.
Some weakened standards may be acceptable to negate the tariff effect.
Weaker rupee may be good for exporters
Depreciating the rupee makes Indian products cheaper to foreign buyers.
The Reserve Bank of India has enough firepower with its foreign exchange reserves of $690.72 Billion to control volatility and allow a gradual depreciation in order to maintain competitiveness.
The market participants think that the RBI is defending certain currency levels but will not resist depreciation outside of its comfort zone.
Jigar Trivedi is a senior research analyst with Reliance Securities.
RBI declines at a slower pace
The RBI reiterated its position that it is not a target exchange rate but rather aims to reduce excessive volatility.
Analysts believe the central bank is likely to continue smoothing fluctuations, while still allowing for the rupee’s gradual adjustment to trade reality.
Anindya B. Banerjee, Kotak Securities: “When the Trade War is On, Currency Becomes a Weapon because You Have to Protect Your Exporters as Much As Possible.”
They may be a little less aggressive, but will still intervene in order to control the rate of depreciation.
Dipti Chitale of Mecklai Financial Services said that a lower rupee is likely to be inevitable until the trade frictions are eased.
She said, “This seems like a sensible approach, particularly since the US has taken a very confrontational position on tariffs.”
The post Rupee rises against the dollar despite regional weakness may be updated as new information unfolds
