Volatility in rupee cools as FIIs return

Mumbai: The rupee has emerged as an island of calm in the sea of chaos and panic around it.
Since March 24, a day after the equity indices in Mumbai hit their recent lows, the one-month Rupee Options Volatility Matrix has nearly halved to 5.66 per cent. The gauge, a barometer for exchange rate calmness, was at 10.41 per cent when the lockdown began, data from Financial Benchmark India (FIBL) showed.

The volatility gauge is likely to drop further, perhaps below 5 per cent.

“The fear of wild rupee swings is gone for now,” said Anindya Banerjee, currency analyst at Kotak Securities. “The panic over the pandemic is now receding, giving investors a level of comfort, that business is going to be usual soon. The rupee’s stability should help in getting dollars when India is relatively better placed in dealing with the virus.”

Overseas funds bought $3 billion in the past seven days compared with sales of $7.7 billion in March and about half a billion dollars in April, ET reported on June 8. The purchases were higher in India than in South Korea and Taiwan.

After the lockdown was announced, currency trading hours are now limited to 2 pm instead of 5 pm.

The rupee Tuesday was a tad lower at 75.61 versus 75.54 a dollar a day earlier. It has been trading within a 40 paise range so far this month.

“A combination of factors has helped the rupee turn stable,” said Kunal Sodhani, AVP – Global Trading Centre, Shinhan Bank India. “Those are strong FII inflows in domestic equities, sharp appreciation of the Chinese yuan, and the dollar index indicating downward trajectory. While large corporate share sales, rights issues and FDIs raised demand for currencies, foreign portfolio investors began to deploy new money in local markets.”

Reliance Industries and Kotak Mahindra Bank collectively raised about $9 billion via rights issue and qualified institutional placements, where foreign investors brought in dollars to invest in rupee-backed assets.

Falling crude oil prices and swelling forex reserves, too, added to the sentiment.

Overseas investors are now turning into risk-on mode as countries begin to open economies after months of lockdowns.

“The exchange rate stability is a condition precedent for (global) investors and a key consideration in capital allocation decisions,” said Hemant Mishr, founder of Scube Fixed Income, a Singapore-based fund.

India’s foreign exchange reserves rose for the fifth straight week to hit a new high of $493 billion for the week ended May 29. The RBI’s foreign currency assets jumped by about $15 billion between March 27 and May 29 this year. The rise is supposed to be largely through central bank dollar buying, dealers said.