Feb 28 2019

USDINR Ideas – Big daddy is watching

An extremely eventful week – heightened geo-political risk. Rupee’s reaction is certainly worth introspection. Let’s dig the details.

Indian Air Force strikes happened on the early hours of 26 Feb. On that day, rupee opened around 30 paise weaker at 71.26 (compared to the previous day’s close of 70.97). After a few initial hiccups and an attempt towards 71.34, rupee recovered during the course of the day to close at 71.06 – just 9 paise weaker than the previous close. In the morning session of 27 Feb, there was a response from Pakistan and rupee weakened from 71.00 to 71.48 in 60 minutes. Yet again, rupee regained its composure and closed at 71.22. Today, rupee was predominantly static between 71.10 – 71.20 for most parts of the day and then came the good news (captured Indian pilot to be released tomorrow) – rupee surged 35 paise in 25 minutes to close at 70.72 – strongest close since 12 Feb.

I converse with multiple professionals across the country and everyone is equally surprised at rupee’s resilience in adversity. My sense is that the rupee will not weaken substantially only on account of the tensions at the border. The regulatory authorities will be on a tight vigil during such times. Even though risk appetite will be low and importers will be inclined to hedge, our RBI will be watchful to regulate undue volatility. As such, fears of 72-73 in quick time are uncalled for. Interestingly, 1 month USDINR option volatility (a reflection of market sense on uncertainty) has been stable around 7%.

Probably, it is one of the best times to do vanilla options. Market risk perception is high, risk appetite is low and option premiums are still low – quite unusual (capitalize on it).  

Remember, big daddy is watching, and acting too.