Implied volatility, a measure used to gauge the future price movement of a traded security or currency, indicates that the Rupee could face wild swings if the global trade spat were to escalate further, providing ground for more whipsaw trades in the local unit.
“While large institutions are going long (buy) on the dollar, exporters are going short (sell),” said Anindya Banerjee, currency analyst at Kotak Securities. “Such trades are happening on the exchange traded futures, leading to frequent swings. Volatility may increase amid global and domestic uncertainties.”
The one-month Bloomberg Implied Volatility index, the metric measuring volatility, had hit a 19-month peak at 6.64% last week, the highest since November 28, 2016. It climbed 132 basis points since April. In the past one month, the gauge has remained at 6% or above, a psychological barrier perceived as critical. It closed at 6% Tuesday.
The rupee hit a record low at 69.09 a dollar on June 28, extending the units losses against the US dollar to about 7% this year. Some traders are predicting the rupee could touch as low as 70.
Crude oil prices remain elevated. India is a major importer of energy from Iran. If sanctions are placed on Iranian imports, India must pay more to slake its oil thirst. This, in turn, would put pressure on the countrys widening fiscal deficit.
“There are a lot of headwinds around the world – the trade war, oil prices and evolving macros in the emerging markets,” said Ashish Vaidya, head of markets for India at Singapore's DBS Bank. “This may collectively increase volatility in the currency market, extending the rupees losses against the dollar.”
Globally, central banks have bailed out companies by keeping borrowing costs low. The central banks are now unwinding such measures gradually.
Any deviation from the stated moves by central banks could shake investor confidence, resulting in the likely exit of global funds from the emerging markets.
“While importers rush to book forwards contracts amid a falling rupee, exporters gaining from a falling rupee are also making daily trading bets. This, too, is adding to the rupees volatility,” said K N Dey, founder of forex advisory firm United Financial Consultant.
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