In month since the change of guard at RBI, rupee's volatility picks up

The Indian rupee's volatility picked up in the one month following the change of guard at the Reserve Bank of India, and analysts reckon that the central bank will be taking a more flexible approach to managing the exchange rate.

Since career bureaucrat Sanjay Malhotra took charge as the RBI chief on Dec. 10, replacing Shaktikanta Das, the rupee has declined by more than 1% against the dollar and gauges that measure its volatility have nudged higher.

The dollar-rupee pair's 1-month daily realized volatility touched a near-six-month high late in December while implied volatility, a gauge of future expectations, rose to 3.5%, its highest since August 2023.

The 1-month realized volatility had sunk to an over-20-year low in the middle of 2024.

That tranquil run is unlikely to be repeated, analysts said, with the central bank's capacity to intervene in the forex markets challenged by multiple headwinds.

"The RBI has demonstrated higher tolerance for a weaker INR in the last few weeks. We think the RBI will now use its ammunition more judiciously given the high level of uncertainty," Standard Chartered Bank said in a note on Friday, lowering its rupee forecast to 86.25 by March 2025 from 84.50 earlier.

ANZ Bank is more pessimistic, calling for the rupee to decline to 88 by March, while pointing out that "greater flexibility (for USD/INR) is inevitable".

The calls for higher flexibility and a weaker rupee come amid India's foreign exchange reserves declining over $64 billion from their record high in September on persistent dollar-selling interventions.

The rupee was slightly weaker at 85.88 against the U.S. dollar on Friday, after slipping to an all-time low of 85.9325 in the previous session.

Traders are already sensing the change with many pointing to a "tactical shift" in the way the RBI intervenes.

While the central bank "stubbornly defended levels before, it seems more focused on preventing runaway moves now while allowing wider intraday ranges," a senior trader at a state-run bank said.