Options tilt most in favour of Indian rupee in over a decade after heavy RBI intervention

The 1-month 25-delta risk-reversal for the dollar-rupee pair, a gauge of near-term options market sentiment, has slipped to -0.8, the lowest in data going back to late 2012

The Indian central bank's aggressive foreign exchange market intervention on Wednesday has sparked a positive shift in sentiment on the rupee in the options market, with a key volatility skew turning the most in favour of the currency in over a decade.

The rupee had its best day in four months on Wednesday due to RBI’s intervention, and extended gains on Thursday, rising more than 1% from a near-record low the previous day.

MARKET REACTION

The 1-month 25-delta risk-reversal for the dollar-rupee pair, a gauge of near-term options market sentiment, has slipped to -0.8, the lowest in data going back to late 2012.

This signals that the market has flipped in favour of rupee strength as traders are more willing to pay for bets on the rupee rising than for protection against it falling.

Still, analysts reckon a significant rally in the rupee is unlikely in the near term.

WHY IT'S IMPORTANT

The shift in options market sentiment underscores the effectiveness of the RBI’s decisive intervention, which traders say has bought the rupee breathing space from relentless pressure due to punitive U.S. tariffs, a rally in gold prices, and patchy portfolio flows.

KEY QUOTES:

"The RBI's firm intervention was obviously not an expected one. The market feels that it was geared towards making room for the currency and giving some comfort that the currency is not going to depreciate towards 90," said Abhilash Koikkara, head of forex and rates at Nuvama Professional Clients Group.

While the risk-reversal is pointing towards dollar weakness, Nuvama does not expect a major appreciation in the rupee, he added.

Sentiment on the rupee wasn’t overly bearish prior to Wednesday’s intervention, and the RBI’s intervention has helped clear out a chunk of speculative long-dollar positions, a trader at a Singapore-based hedge fund said.