The rupee is set to extend its slide from record lows in the near term, with the options market signaling a significant chance of the currency weakening to 87 per dollar by the end of March.
There’s a nearly 60% likelihood of the rupee falling to this level, compared with just an 9% chance of it recovering to 84 during the same three-month period, according to market estimates based on quoted implied volatility as of late Thursday, collated by Bloomberg.
“Most prefer a softer rupee in the short-to-medium term, aligning with broader dollar strength across Asian currencies,” said Mukund Daga, head of foreign exchange-options for Asia at Barclays Bank Plc in Singapore. The rupee is likely to trade between 88.50 and 89.00 over the next six months, potentially regaining some lost trading competitiveness, he said.
Traders are placing bearish bets on the Indian currency through topside call spreads and digitals, Daga said. A topside call spread is used when a trader expects a moderate rise in the price of the underlying asset — in this case the USD/INR pair — while digital calls provide payouts if the pair ends above a certain strike price at expiration.
The rupee is nearing the 86-mark, following a series of record lows driven by a surging dollar. Volatility has also risen to its highest in more than a year, stoking speculation that the new central bank governor may allow the currency to fluctuate more naturally compared to his predecessor.
Standard Chartered Plc lowered its rupee forecast to 87.75 to a dollar by end-2025, from 85.50 previously.
“External buffers are still strong, but we think the RBI will now use its ammunition more judiciously given the high level of uncertainty,” economists including Anubhuti Sahay wrote in a note.
On Wednesday, when the rupee fell to another low, $2.1 billion in notional contracts were traded via dollar-rupee call options in offshore markets — nearly double the notional traded via puts, according to Depository Trust and Clearing Corp. data.
“This shows that market participants continue to place elevated bets on a continued dollar advance,” said Akshay Chinchalkar, head of research at Axis Securities Ltd. in Mumbai.
The dollar has rallied for three straight months ahead of Donald Trump’s inauguration, and may continue to strengthen more if US non-farm payrolls data on Friday further reduces expectations for Federal Reserve rate cuts.
Barclays estimates the breakeven for a three-month USD/INR option at 88 if the dollar continues to gain. Conversely, a weaker greenback may lead to a pullback to 85.50 by the end of March, as per calculations early Thursday.
The British bank notes that any depreciation in the rupee will likely be measured when compared with Asian peers as India’s economic fundamentals remain stable.
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