Recent volatility won't affect rupee's exchange rate, say bankers

The Indian rupee's exchange rate will not be affected by the recent volatility in the currency's exchange-traded derivatives, which was sparked by traders furiously unwinding positions to comply with a central bank rule, four bankers said on Thursday.

The considerable volatility in the rupee's exchange-traded derivatives, particularly options, on Wednesday persisted on Thursday as brokers asked clients to unwind positions or provide proof of underlying forex exposure, market participants said.

Brokers took this step as they thought that a central bank rule stating exchange-traded rupee derivative transactions can only be used for hedging, meant clients without an underlying forex exposure could not hold such positions once the rule kicks in on Friday.

While this forced some traders to square off their existing exchanges positions and disrupted futures and options trading, bankers said this will not have any consequences on the over-the-counter spot dollar/rupee exchange rate.

"Futures and options prices have diverged from OTC because no new positions are allowed (on exchange rupee derivatives)," said Anshul Chandak, head of treasury at RBL Bank.

"However, that by itself will not have an impact on spot."

To impact spot prices, the size of the option position being unwound has to be significant, a treasury official at a private sector bank said.

"The risk that the option positions (on exchanges) carry is too low relative to the depth of the OTC market," the official said, declining to be named as he is not allowed to speak to the media.

He highlighted that when option prices on exchanges "took off" on Wednesday, the dollar/rupee spot was confined to a narrow range.

The spot rose by less than 0.1% on Wednesday and by a similar margin on Thursday to 83.4475, after dropping to a record low of 83.4550.

The larger implication of the central bank's hedging rule will be that speculation will cease on exchanges and liquidity will drop, said VRC Reddy, treasury head at Karur Vysya Bank.

"It will not affect spot."