By Jaspreet Kalra
MUMBAI (Reuters) – The Indian rupee rose on Wednesday, aided by a broadly softer dollar ahead of closely watched U.S. inflation data, while the dollar-rupee implied volatility signalled that the currency is poised to experience sharper swings going ahead.
The rupee was at 86.48 as of 11:00 a.m. IST, up nearly 0.2% on the day.
The currency had weakened to yet another all-time low of 86.5825 in the previous session, pressured by dollar bids spurred by the maturity of positions in the non-deliverable forwards market.
On Wednesday, though, a pullback in the dollar index from an over two-year peak supported the rupee, which has logged multiple record lows over the last few months.
The currency’s pace of big-figure declines has ramped up as it fell to 86 from 85 in less than a month. In comparison, it took the unit about two months to weaken to 85 from 84, while the decline to 84 from 83 took about 14 months.
Amid these declines, the rupee’s implied volatility, a gauge of future expectations, has risen across tenors. The 1-month implied volatility is hovering near a 16-month peak, while the 6-month and 1-year gauges have also moved higher.
“The recent equity market correction, FII (foreign institutional investor) outflows and overvaluation of the INR suggest that the rupee will continue to face downward pressure in the near term,” ING Bank said in a note.
Foreign investors have net sold over $4 billion of local stocks and bonds so far in January, while the benchmark Indian equity indexes are over 10% below their record highs hit in late September.
Persistent strength in the dollar and caution about the potential impact that incoming U.S. President Donald Trump’s trade policies may have on currency markets has also added to the pain.
Amid these headwinds, sources told Reuters that India’s central bank will be more judicious in its use of foreign exchange reserves to mitigate currency volatility.
(Reporting by Jaspreet Kalra; Editing by Sonia Cheema)
