Rupee volatility hits year-high, spotlight on RBI's currency strategy

The rupee's one-month implied volatility versus the greenback rose to as much as 4.09 per cent, the highest since August 2023

By Bhaskar Dutta and Malavika Kaur Makol

 

A gauge of the Indian rupee’s volatility jumped to its highest level in over a year, fueling speculation that the nation’s central bank may be easing its tight grip on the currency amid a strong dollar.

 

The rupee’s one-month implied volatility versus the greenback rose to as much as 4.09 per cent on Monday, the highest since August 2023. This marks a shift from the currency’s recent stability, which saw the volatility gauge hit a record low this August. Traders say the spike suggests a possible shift in the Reserve Bank of India’s strategy.  

 

“We think the RBI may actually allow a little more volatility given the various risks of low volatility such as complacency in terms of domestic hedging activity,” said Mitul Kotecha, head of Asian FX and EM macro strategy at Barclays Bank Plc. Also, “capping INR volatility means that the currency may not adjust as quickly and could be prone to eventually larger moves.”

 

The new RBI Governor Sanjay Malhotra, who took over from a regime known for intervening firmly in the currency market, has yet to comment on the central bank’s foreign-exchange strategy.

 

The rupee fell as much as 0.7 per cent versus the dollar to a new low on Friday, with the currency capping its worst week since March.

 

To be sure, the rupee is still firmly placed in the list of low-volatility currencies, ranking below the Chinese yuan, the Malaysian ringgit, the Indonesian rupiah and the Philippine peso in a Bloomberg index. The rupee has weakened 2.7 per cent versus the dollar so far in 2024, faring better than most Asian peers.

 

Still, the pressure on the yuan, concerns over potential US tariffs and slowing local growth pose headwinds for the rupee. Additionally, India’s 40-currency trade-weighted real effective exchange rate, a measure of competitiveness, hit an all-time high of 108.14 in November, indicating an overvaluation of more than 8 per cent.