Is dollar-rupee eyeing a breakdown below 81.50?
Russia-Ukraine war and central bankers’ tightening spree to get the upper hand in their battle against inflation. As a result of the double whammy impact of geopolitical tension and higher borrowing cost, the USD being a global cycle currency traded at the highest level in 21 years. At the same time, the Indian rupee was seen steadily depreciating from 74.50 to 83.25, a fall of more than 11%.
As the year progressed towards the end, inflation started to revert towards its mean and thus the expectation of jumbo hikes was slashed, and the dollar gave up its strength. But despite the weakness in USD, the rupee didn’t experience positivity and went for a lengthy consolidation. The consolidation in the USD-INR pair, which started around October 2022 is still intact.
It was seen bottoming near the 81-81.50 zone and topping near the 82.80-83.25 zone. The major reason behind the sideways move or lower volatility is the RBI’s regular intervention on both sides. Recently, just before last week’s spikes in the pair, Rupee’s 1-month implied volatility was at below 5% and one-year implied volatility was at 5.20%, the lowest since 2007.
The given excerpt from RBI’s bulletin suggests that Rupee holds the lowest volatility among the list of foreign currencies. Who had benefited through the lower volatility: 1. Importers: It was a complete turnaround period for the importers’ risk management strategy.
The premium cost for the importers was around 4% — 4.5% in 2022 and volatility used to be medium to high. But now the cost has been reduced by more than half. Along with that, lower volatility due to a prolonged consolidation is the double benefit for the importers.
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