Time to turn to currency options

SINCE JULY LAST year, the Reserve Bank of India's (RBI) efforts to squeeze out volatility from the USDINR market resulted in the formation of a crumbling cliff, and, when push came to shove—as it did with Trump's victory in the US presidential election—the rupee keeled over, falling sharply to yet another all-time low.

- JAMAL MECKLAI

Tragically—and as was pointed out by myself and many other analysts—the approach, so obviously flawed, had several other negative impacts: the RBI's foreign currency assets (FCA) fell dramatically (USD 100 billion and counting since October 2024, if we include its forward sales); volatility in the domestic money market increased, making it difficult for banks and corporates to plan their cash flows (which limited growth); and the rupee's real exchange rate climbed (rendering exports less competitive).

Fortunately, the change of guard at the RBI—the new governor was sworn in on December 11—appears to have prompted some fresh thinking in the area and (see table) the rupee is now already more closely linked with the global market, as we had recommended. The correlation between dollar (DXY) strength and rupee weakness has increased from 25% or so to over 50% in the past three weeks, and there also appears to have been a reduction in the rate of decline in the FCA (certainly compared to October 2024), despite an increase in the pace of USD appreciation.