‘USD/rupee pair may touch all-time high if Coronavirus-induced disruptions exacerbate’

As long as further new cases are not reported the sentiment should be stable. This could be positive for the rupee.

In the past few sessions, the move in the Indian rupee has been largely offshore-driven. The reason for USD/INR being bid in offshore is that a prolonged period of low volatility had caused investors with exposures to Indian assets to leave foreign currency risk unhedged.

These investors on the first signs of panic have scampered to put on hedges. The offshore bid has percolated to onshore. USD/INR spot onshore has been constantly bid as arbitrageurs have been seizing the gap between offshore and onshore forward points.

one-month offshore forward points are 30p higher than onshore, indicating tremendous pressure on Rupee in NDF. Vols have spiked. one-month ATM vols which were close to 4.6% not long ago have spiked to 6.6%. The Vol curve has inverted. one-month volumes are higher than 3m vols indicating panic. RRs have spiked.

offshore points cool off. However, if Coronavirus-induced disruptions exacerbate, we may see a follow-up move in USD/INR to new all-time highs.

The entire hypothesis that India is relatively immune to Coronavirus will go for a toss if more cases come out. If the disease spreads, it would compound the challenges for the government and the central bank who are already grappling with the weakest economic growth in 7 years. FPIs rushed to dump Indian assets.

In a surprise out of policy move, the US Federal Reserve cut the overnight federal funds rate by 50bps. The next FOMC rate decision is due on 18th March. This could have been what the global central bankers would have decided in today’s meet of G7 central bankers and finance ministers.

The coordinated action of global central bankers brings back memories of the historic plaza accord of 1985 when major central banks agreed to let the USD weaken to spur one of the biggest engines of global growth. However, how effective a monetary policy action could be in times like these is debatable. It may do little to stabilize the real economy if Coronavirus induced disruptions exacerbate. It may ensure a speedy recovery to normalcy if the virus relents.

We believe if the global risk sentiment holds up, the RBI has sufficient arsenal to manage the volatility in Rupee. With the prospects of bond inclusion and RBI’s intent to make Rupee more tradeable onshore, we may see the RBI relax underlying requirements. As long as further new cases are not reported the sentiment should be stable. This could be a positive for the Rupee.

In the current scenario, with considerable uncertainty around, we would advise our exporter companies as follows:

1) Companies who are below their hedge ratio as per policy can add hedges by booking forwards at key strategic technical levels i.e. 73.60 and 74.10 and take the ratio up slightly at 50 paise gaps.

2) Companies who can hedge through options should add Risk Reversals around 73.60, 74.10, 74.50 and book through put options plain vanilla say 74 to protect cost if Rupee depreciates till there.

3) Companies who are concerned about their underlying exposures being cancelled or postponed due to Coronavirus induced disruptions are advised to buy out of the money puts as insurance say at 75 they should buy 74 puts or take long term premium paying options where risk reward is 1:3 plus.

4) Companies who are hedged completely are advised to keep utilizing the contracts and not over the hedge.

Importers are advised to hedge their exposures through Buy-side Risk Reversals (buy calls sell puts). Those who do not have the option of hedging through RRs can add hedges on dips to 72.90 and 72.60. On break and close below 72.40 importers are advised to go slow on their hedges and hedge only through RRs.”

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