Rupee losing its nerve on rising crude prices, pre-poll jitters

After being the best performer in the first quarter of this year, the rupee is turning volatile due to rising crude oil prices and concerns over fiscal deficit as the next government assumes office.

The one-month Bloomberg Implied Volatility Index has surged more than 350 basis points in just the past five weeks after oil continued to edge higher.

The gauge was at 9.45 per cent on Tuesday compared with 5.87 per cent on March 15. The gauge closed at 8.69 per cent versus 8.11 per cent on Monday.


“Volatility in the foreign exchange markets is a result of a combination of factors working in tandem,” said Bhaskar Panda, Executive Vice President, Treasury, at HDFC Bank. “Uncertainties are manifest as India awaits the election results. The sharp rally in global oil prices is adding to apprehensions, particularly for those countries running on twin deficits. The rupee may continue to extend losses until Mayend.”

The local unit is more likely to trade in a broad range between 69 and 71.50 until the end of May, dealers have said.

The rupee was a tad up to close at 69.63 a dollar on Tuesday compared with 69.67 a day earlier.

But it swung in the range of 69.84-69.53 during the day.

“Traditionally, volatility rises ahead of the general election results,” said Anindya Banerjee, currency analyst at Kotak Securities. “This time, the surging global crude prices have added to the market’s woes as investors and traders are turning wary of investing in India for now.”

Global crude oil prices have surged more than 10 per cent in the past one month amid reducing supplies. Wild swings have made importers wary of buying currency covers while exporters find it cheap to buy such hedges.

“Importers are now waiting on the sidelines as they expect the volatility to contract in the next few weeks,” said Gaurang Somaiyaa, currency analyst at Motilal Oswal.

“Hedging too has become a bit expensive for them due to the rise in volatility.”

One-month futures contracts are now available at a 30 paise premium, compared with 22-24 paise a month earlier.