USD/INR weakened, falling 0.5% to 95.71 last Friday and, over the week, declining a further 0.3%, as the Indian Rupee (INR) stayed under pressure from elevated global oil prices and firm demand for the US dollar. The Reserve Bank of India (RBI) has been active in the spot market and has tightened gold import rules, actions that have offered some support to the currency.
Local media reports said RBI Governor Sanjay Malhotra may consider a rate hike at the next policy meeting on 5 June. Any tightening may be paired with additional steps, including US dollar bond issuance and special schemes aimed at attracting dollar deposits from non-resident Indians, echoing measures deployed during the 2013 Taper Tantrum.
RBI Actions And Short-Term Outlook For USD/INR
We see the Reserve Bank of India is actively trying to strengthen the rupee through spot market sales and tighter gold import rules. This direct action is putting a temporary cap on the USD/INR exchange rate. For us, this suggests that the pair may struggle to move much higher in the immediate days ahead.
The main event we are watching is the central bank meeting on June 5th, where a rate hike may be announced. We expect implied volatility on USD/INR options to increase noticeably as we get closer to this date. This makes buying volatility through straddles a potential strategy to profit from a large price swing, no matter the direction.
Historical Context, Policy Firepower, And Trade Strategy
This multi-pronged approach of rate hikes and dollar-attracting schemes is very similar to the playbook used during the 2013 Taper Tantrum, which ultimately stabilized the rupee. History suggests these measures, when combined, can be very effective. India’s foreign exchange reserves, which currently stand at a record high of over $640 billion, give the central bank significant firepower to back up its policy decisions.
Given the RBI’s clear intention to support the rupee, we believe the risk is tilted towards INR strength following the June meeting. We should therefore consider buying USD/INR put options expiring in late June or July. This allows us to position for a potential drop in the pair while clearly defining our maximum risk.
