This Article is From Mar 13, 2020

Three Signs That The Battered Rupee Is In For More Pain

The rupee's one-month risk-reversal rate shows that the premium to protect against dollar strength in the options market surged to the highest since November 2013 on Thursday.

Three Signs That The Battered Rupee Is In For More Pain

Expected swings in the rupee near term are signaling potential for more declines

The rupee has been among the most battered currencies in Asia this month, and the options market is signaling that its troubles are far from over.

The currency is staring at a record low following a 2.8 per cent slump so far in March, as foreign investors flee Indian assets on concern that rising local and global coronavirus cases will inflict more pain on an already struggling economy.

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Here's a look at three metrics that show how the bearish sentiment is intensifying:

Risk Reversals

The rupee's one-month risk-reversal rate shows that the premium to protect against dollar strength in the options market surged to the highest since November 2013 on Thursday.

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"The jump in options tells us that the market expects the rupee to be volatile in the short term and it may see further weakness," said Rohit Garg, a Singapore-based emerging-markets strategist at Bank of America Securities. When a risk-off wave is sweeping across the globe, "India can't remain insulated," he said.

Forwards

One-month dollar-rupee forwards are climbing for a fifth straight week and have reached an all-time high of 75.63. The rupee closed at 74.2175 per dollar, near a record low of 74.4825 set in 2018.

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"What we are seeing is an extreme bearish sentiment building up for the rupee," said Anindya Banerjee, a currency analyst at Kotak Securities Ltd. in Mumbai. The rupee could test new lows unless the central bank jumps in to curb the losses, he said.

The Reserve Bank of India will auction $2 billion worth of dollar-rupee swap contracts to curb the local currency's drop, it said late Thursday.

Volatility

Expected swings in the rupee near term are also signaling potential for more declines.

A gauge of the currency's one-month implied volatility, used to price options, is rising for a fourth week and surged to the highest since May 2014 on Thursday, according to data compiled by Bloomberg.