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Low INR Volatility Allows for Less Aggressive RBI Intervention, Build-Up of FX Reserves

INDIA
  • Despite prevailing weakness in the USD index following the May FOMC meeting, USDINR closed Thursday’s session marginally in the green, close to its recent highs with attention remaining on April’s record high of 83.5750.
  • But despite its proximity to all-time highs, USDINR volatility remains low (3-month implied vols have returned below 3.00% from the mid-April highs found closer to 3.50%), with the rupee barely changed against the greenback during April in contrast to most of its Asian peers.
  • Indeed, the RBI’s latest monthly bulletin showed that it bought $8.5bn in February, a level of gross FX intervention which marks the lowest in six months. Tolerance of higher USDINR within a low vol environment has enabled the RBI to build its FX reserves, while the inclusion of Indian government bonds into JP Morgan’s EM Government Bond Index from June may provide an additional boost to reserves further ahead.
  • Meanwhile, higher crude prices and more hawkish Fed rate pricing have been flagged as potential INR headwinds.
  • Separately, the ongoing elections provides the key domestic risk event, with incumbent Prime Minister Narendra Modi widely expected to secure a third consecutive term in office (full preview from our Political Risk team here).
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