Bank of America Corp. maintains a positive outlook on the Indian rupee, even as market volatility indicators increase due to ongoing elections in the country.
“Despite the rise in implied volatility and skew in options markets due to election risks, the Indian rupee has remained within a narrow range,” stated strategists including Claudio Piron in a note. They highlighted that realized volatility is near multi-decade lows, suggesting that market participants expect the Reserve Bank of India (RBI) to intervene and stabilize the currency after the election results are announced.
The implied volatility for one-month dollar-rupee options has surpassed that of three-month options, creating an inverted curve. This short-term volatility has been rising steadily since the election process began last month. Concerns have been fueled by lower-than-expected voter turnout, casting doubt on Prime Minister Narendra Modi’s Bharatiya Janata Party’s chances of securing a third term. The election results are anticipated on June 4. On Wednesday, the rupee appreciated by 0.1% to 83.22 per dollar, marking its highest level since April 10. Bank of America predicts that the RBI might allow the rupee to appreciate by 1%-1.5% as a signal of market confidence if the election results indicate a stable government.
To capitalize on this potential appreciation, the bank has utilized a one-touch downside option on USD/INR with a strike price of 82.5/USD. One-touch options necessitate the underlying asset reaching a specified price within a set timeframe to be profitable.
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