Mumbai: The rupee may have recently charted new lows against the US dollar, but market players are not unduly worried, with a senior Bank of America executive pointing to key metrics that reflect stability in the local currency and fundamental drivers that will boost its appeal whenever the US central bank cuts rates.
“The current up-move in dollar/rupee to 83.70+ level if you see, has been gradual and orderly. The market positioning is not skewed to the long rupee side, which would otherwise cause a bout of position unwinding. Also, despite the rupee being near all-time lows, the FX options market isn’t showing any signs of nervousness,” Rahul Namjoshi, head of India fixed income, currencies and commodities sales at Bank of America, told ET.
The one-month implied volatility being priced by the foreign exchange options market has been below 2% for six months now, much lower than 3.5% a year ago, he said. On Friday, the rupee ended trade at an all-time low of 83.73/$1, having depreciated around 0.1% versus the US currency for the week, LSEG data showed. The weakness in the rupee has been driven by sharp volatility in the Chinese yuan, as well as foreign outflows from stock markets, which turned choppy after the government raised capital gains taxes on equities in the budget for FY25.
While the rupee’s trading range has shifted from 83.00-83.50/$1 in April-June to around 83.40-83.70 this month, a sub-1% current account deficit and a steadily reducing fiscal deficit would ensure that any weakness in the local unit remains contained, the veteran trader said.
Moreover, the Reserve Bank of India, which has ensured least volatility for the rupee over the past year, would continue building its foreign exchange reserves amid foreign inflows in debt following inclusion of local bonds in a JP Morgan index, thus reining in the potential of the rupee to appreciate against the dollar.
“A gently depreciating currency may keep the rupee competitive and support the government’s ambitions for attracting large-scale manufacturing investments. We are looking at dollar/rupee to be at 84.00 by the end of the year,” said Namjoshi. Analysts have recently flagged the rupee’s valuations, pointing to recent RBI dollar purchases potentially being driven by the central bank’s desire to ensure the rupee’s competitiveness.
“The RBI has net purchased dollars in July, with a focus on limiting overvaluation of the rupee. On the REER metric, the rupee is overvalued by 6.5% as of June 2024,” IDFC First Bank chief economist Gaura Sengupta wrote in a July 26 note.
