Rupee makes smart recovery aided by foreign investor flow into equities

MUMBAI: Rupee bears in the currency futures market were hit by sharp losses after the local unit staged a sharp recovery, aided by positive foreign investor flows into equities for the first time in over two weeks. Thursday’s events on the currency futures markets have raised hopes among analysts that the local unit was unlikely to encounter a dramatic fall.

Maximum traders’ outstanding positions, or open interest (OI), worth $350 million were at the 69 strike dollar call option on the NSE on Wednesday. As the rupee recovered from its intraday low of 68.58 to around 68.47 on Thursday, call option fell 27% to close at almost 8 paise, provisional NSE data shows. While the option’s price fell, OI rose by $20,000 to $370.3 million.

Falling price, accompanied by rising OI, indicates short positions being built. That’s because those selling the 69 call don’t expect the rupee to weaken over the next five days when the current series of derivatives expires. This enables them to pocket the premiums received from option buyers.

Here’s how. On Wednesday, the 69 call closed at 10 paise or Rs 100 per contract. Those who sold a maximum 10,000 contracts each received Rs 10 lakh as premium.

After Thursday’s smart rupee recovery, price of the 69 call fell 20% to 8 paise, or Rs 8 lakh per 10,000 contracts. That enabled sellers to square off at a Rs 2 lakh gross profit while option buyers had a similar loss. “We don’t foresee a drastic fall in rupee based on the options data,” said Viral Shah, senior VP at Geofin Comtrade. Agrees Harish Galipelli, head of currencies & commodities at Inditrade.

However, if the rupee does indeed weaken past 69, sellers of calls will face unlimited losses. Those expecting rupee to rise purchased the 68 strike dollar put, which has OI of $266 million.