Traders and investors worldwide are talking about the Indian rupee’s stability, which is causing quite a stir in Mumbai’s financial markets. Despite a global trend of currencies being less volatile, the Indian rupee’s swings have hit a record low. This has led traders from places like London and Singapore to wonder when the Reserve Bank of India (RBI) will loosen its grip and allow the rupee to fluctuate more freely.
In June, the rupee’s volatility against the US dollar dropped to its lowest level since 2005. This caught the attention of investors who attended events hosted by Citigroup Inc and ICICI Securities Primary Dealership Ltd. The reason behind this stability is the strong control exerted by the RBI to keep the rupee within a narrow range.
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To maintain currency stability, the RBI has already added $32 billion to its reserves this year by absorbing foreign funds. It has also increased its dollar forward book by around $10 billion in the first four months of the year. Some experts believe that the RBI’s efforts to stabilize the rupee are aimed at making it more attractive for international trade.
Investors who focus on fixed-income securities are seeking ways to navigate the unique situation in India. One approach they consider is to bet on the rupee getting stronger if they believe the US dollar will weaken. However, traders are hoping for more volatility, while investors are willing to wait for the RBI to loosen its control on the rupee.
Compared to other Asian currencies, the rupee’s historical volatility has been the lowest over the past year, except for the Hong Kong dollar. This aligns with the global trend of assets being less volatile. The JPMorgan Global FX Volatility Index, which measures currency volatility globally, has decreased from its peak earlier this year.
Interestingly, despite attracting over $12 billion in investments to Indian stocks, the rupee’s value has not increased significantly. In contrast, Indonesia’s currency has gained about 3% with only a small fraction of those investments. The RBI maintains that it intervenes in the market to prevent excessive fluctuations in the rupee.
Major investors, such as M&G Investments, are positive about the rupee due to India’s improved economic conditions and being the fastest-growing major economy in the world. They believe that India’s favorable balance of payment and the relocation of global supply chains contribute to its growth potential.
While the stability of the rupee is seen as a positive aspect, it also raises concerns among analysts and investors. Historical data shows that prolonged periods of stability have often been followed by sharp declines in the rupee’s value. Low volatility can lead to complacency, as companies may not adequately protect themselves against currency risks. Moreover, foreign investors adjust their positions based on volatility, which could lead to an excessive exposure to the rupee if volatility increases suddenly.
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