Volatility on 12-month rupee options may rise to 8%, the highest since November 2002, from 6.7% now, said Baweja.
MUMBAI: Foreign exchange traders and analysts expect the rupee to move sharply and in larger bands as India attracts more and more foreign flows and the central bank struggles to manage the currency together with economic growth in the economy and inflation.
The currency market, which was considered dull a couple of years ago, with the rupee not moving more than 10 paise per day, is now-a-days much more volatile with even a 30 paise movement in the exchange rate being considered normal.
“Volatility has increased clearly — there are more phases when the rupee moves sharply now than two-three years ago. Besides the flows, the Reserve Bank of India has also loosened its control, may be in preparation for capital account convertibility,” said a chief dealer from a US bank. Increase in foreign exchange volumes has also attracted speculative flows, he added.
“The ‘unholy trinity’ (free movement of capital, a fixed exchange rate and an independent monetary policy) really means that the degree of freedom for the currency should rise,” said Bhanu Baweja, a London-based strategist at UBS.
Volatility on 12-month rupee options may rise to 8%, the highest since November 2002, from 6.7% now, said Baweja.
“Rupee has moved sharply from 44 to 41/$1 and now we are seeing a 25-20 paise movement in two hours. This is because both importers and exporters have learnt to hedge. The stock market is also seeing flows which were not seen about 5 years back. Going forward we would see more cost structuring by companies because of the volatility,” said Standard Chartered Bank’s managing director and head global markets, Sundeep Bhandari.
The rupee-dollar rate has been in the 40.20-40.50 rupees per $1 band for the last few days as the RBI is buying dollars at lower levels while exporters are selling whenever the dollar threatens to rise. But, such a band is unlikely to hold. “Once the 40.50/$1 level breaks, the rupee may weaken sharply,” said Abheek Barua, chief economist, HDFC Bank. He expects the rupee to weaken to Rs 41.50-42 per dollar by September-end as rupee negatives like high oil prices, increased risk aversion due to the US credit crisis and moderating exporter sales come into prominence.
The rupee rose 0.02% to close at 40.415 against the dollar on Tuesday.
Analysts are, however, still bullish on the Indian currency in the long term. Bhandari expects the rupee to weaken to 41.80 by December due to negatives like trade deficit. He, however, expects it to bounce back to 41.50 in the next 12 months and even hit 38 by 2009.
With inputs from Bloomberg
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