Big Daddy Holds Sway Over Rupee Market Spurring
Trader Angst
(Bloomberg) -- Raghuram Rajan might be gone, but Big Daddy still reigns supreme in
India’s currency market.
Big Daddy? That’s how traders in Mumbai refer to the central bank when it intervenes to
curb rupee swings, a strategy used by former Governor Rajan that’s seen volatility
dwindle to the lowest level among emerging-market currencies after the Chinese yuan
and pegged Hong Kong dollar. Early signs are that new Governor Urjit Patel is just as
committed to the cause, though he’s having to work harder to stabilize the rupee:
India’s foreign-exchange reserves slumped by the most since 2013 in the first week of
October, suggesting officials sold dollars to bolster the currency.
While Big Daddy might be unpopular with traders who make a living from volatility, he’s
been a friend to investors, with the currency calm helping the rupee deliver Asia’s best
total returns. That may be setting up the market for a rude shock. Patel has already
provided one surprise -- an interest-rate cut that Nomura Holdings Inc. said diluted the
bank’s previous inflation framework -- and Mecklai Financial Services Pvt Ltd. says
investors and companies are unprepared for the consequences should the central bank
lose its rupee grip.
“Pushing volatility continuously lower has its risks,” said Jamal Mecklai, a 40-year
veteran of the currency market who has served on two committees set up by the RBI
and runs treasury risk-management firm Mecklai Financial Services. If the central bank
is signaling a more accommodative policy stance, “is this making hot money hotter. If
and when the turn comes, will people fly faster?”
India’s monetary authority has bought and sold $415 billion since August 2013, about
five times more than transacted in the previous three years. Former Governor Rajan had
said the central bank intervenes to curb volatility and doesn’t target any particular rupee
level. Investors are now eagerly watching the central bank’s policies amid rising risks
from maturing foreign-currency deposits and as a potential Federal Reserve interest-rate
increase hangs over global financial markets.
The central bank calls currency desks inquiring about the kind of inflows they are seeing
or why they are buying or selling dollars when rupee moves appear unusual, according
to two traders, who asked not to be identified citing rules. As well as Big Daddy, there’s
also “Daddy” for the biggest state-run bank that the RBI uses to carry out its orders.
“The RBI’s presence in the currency market is the main reason for the rupee’s stability,”
said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd.
“On most days, there is hardly any movement in the rupee and on few days of action, it
stands on both the selling and the buying side to make sure it’s on top of everyone in
the market.”
The intervention has helped curb growth in rupee trading, with average daily turnover
rising by $6 billion in April 2016 from three years earlier, compared with a $14 billion
increase in the prior survey period, data from the Bank for International Settlements
show. The Reserve Bank of India didn’t immediately respond to an e-mail seeking
comment.
Sea Change
The central bank’s involvement in India’s foreign-exchange market underwent a sea
change after the rupee fell to a record low of 68.8450 per dollar in August 2013 and
Morgan Stanley named the currency as one of the “Fragile Five” due to its vulnerability
to capital flight. While the RBI never announced a policy change, its presence in the
market has been increasingly hard to ignore.
Traders can reel off a long list of times when they say the rupee’s moves prompted
central bank intervention, which is said to be carried out through state-run lenders
including State Bank of India, which declined to comment.
In January and February, when the rupee fell 3.3 percent as concern about China’s
sinking yuan fueled a global market rout, the RBI’s foreign-exchange reserves
contracted $5.3 billion. The central bank was said to be in the market after thenGovernor Rajan said he’d step down from the top post, days before the U.K.’s vote to
exit the European Union. It was also said to have sold dollars after India attacked
terrorist camps in Pakistan last month.
Expected rupee swings over three months fell to an eight-year low of 5.4 percent on
Thursday from 21 percent in August 2013. The Indian currency’s average daily trading
range has been about 0.20 rupee so far this year, the narrowest since 2007 and less
than half of what it was in 2013. It was at 66.8525 rupees per dollar on Friday in
Mumbai.
Volatility isn’t suppressed only in the rupee. The same tranquility has crept into currency
trading worldwide, with the JPMorgan Chase & Co. global currency volatility index falling
to the lowest level since December this month.
For investors, the lack of currency swings has meant that borrowing in dollars to
purchase rupee assets earned 15 percent in the past three years, the highest in Asia,
data compiled by Bloomberg show. Buying the Indonesian rupiah delivered a 4.6 percent
return.
India’s economic fundamentals have also grown more attractive for investors over this
period with a narrowing current-account deficit and slowing inflation. Prime Minister
Narendra Modi has accelerated the reform process and vowed to lower the budget
deficit.
That’s assisted the RBI with another cornerstone of its currency policy -- boosting
foreign-exchange reserves, which reached a record $372 billion in September.
For Patel, the war chest may have already stood him in good stead as he manages an
outflow of $20 billion that began in September and will continue into year-end with the
maturing of deposits held by non-resident Indians. The RBI’s reserves fell $5.9 billion in
the first two weeks of October, suggesting dollar sales to shield the rupee.
Currency markets will soon face further uncertainty as the U.S. presidential elections
approach and amid rising odds of a Fed rate increase by December that has already put
emerging-market currencies under pressure.
“Wherever the RBI stands in the FX market, that becomes the inflexion point for the
rupee,” said Anindya Banerjee, associate vice president for currency derivatives at Kotak
Securities Ltd. in Mumbai. “Going forward, the RBI’s currency policy will be put to real
test amid risks from the U.S. elections and the Fed rate hikes.
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http://www.bloombergquint.com/markets/2016/10/27/big-daddy-holds-sway-overindia-currency-market-as-traders-gripe