A relatively stable exchange rate greets the New Year erasing memories of wild swings last year.
The one-month Bloomberg Implied Volatility Index plunged 125 basis points to 8.28% in the past four weeks to the New Year suggesting the local unit is likely to be stable this year. A basis point is one hundredth of a percentage point.
While this will help burnish the allure of domestic securities to overseas investors, companies can breathe also easy on their US exposure.
A stable currency is key to woo overseas investors, who choose not to cover exchange rate risk enhancing investment returns.
“Oil price fall and lower inflation print have collectively helped the rupee to stabilise,” said Ashutosh Khajuria, ED and CFO, Federal Bank. “The free fall of the rupee has stopped, reversing the broader trend. RBI too has stayed off from sharp interventions as it is not required.”
“Price movement per day has reduced by about 20-30 paise on an average vis-a-vis the levels seen more than a month ago,” Khajuria said.
The Bloomberg Implied Volatility Index is a gauge of market expectations on future swings in the rupee-dollar exchange rates.
The rupee gained 0.62% or 44 paisa to close at 69.73 a dollar on Friday. The local unit plunged to record low at 74.48 a dollar on October 11 last year.
“Major worries like higher oil prices, emerging market weaknesses are now things of the past,” said Anindya Banerjee, currency analyst at Kotak Securities. “In the New Year, overseas investors too would begin with new deployments amid receding signs of fears on emerging markets including India and Indonesia. Indian companies are unlikely to rush for currency covers, saving cost on imports.”
“But, domestic elections could well trigger new volatility in coming months but that is going to be short-lived,” Banerjee added.
Indian rupee was lost 8.3% between April and October against the greenback ranking as Asia's worst performing currency. The local unit later recouped some of its losses ending the year with 2.12% fall.
Surging crude prices turned investors sceptical on New Delhis ability to keep current account deficit or excess of overseas expenditures over revenues under check. India is a major oil consuming country.
Global crude prices peaked at $86 per barrel on October 3, but shrank fast by 34% since. Such sharp dips consequently pulled down consumer prices.
Retail inflation plunged to a 17-month low in November to 2.33 per cent, mainly on account of decline in prices.
Importers too have started shying away from taking currency covers against their overseas payables, known as hedging in market parlance, dealers said.
Hedging has a cost. In absence of it, companies save money on imports.