Rocky rupee drives NSE volumes to record high

The average daily turnover of currency futures and options contracts traded on India’s largest exchange hit ₹1.59 trillion, up 22.3% from a year ago.

“Trader interest (rose) in sync with the heightened volatility,” said Anindya Banerjee, vice-president (rupee and interest rate derivatives), Kotak Securities.

The rupee closed at 83.04 to a dollar on 29 September compared to 82.18 on 31 March. In this period, it had risen as high as 81.77 and fallen to as low as 83.27.

The rupee-dollar is the most active pair on the NSE for currency derivatives contracts, accounting for 96% of the ₹159.9 trillion turnover this fiscal year through August, according to Securities and Exchange Board of India data. Proprietary traders have around a 58% share in currency derivatives turnover, followed by retail investors at 21.9%, per NSE data.

There is a lot of interest in the rupee-dollar pair as the American currency has been strengthening since July, not just against the rupee but also the euro, the Swiss franc and the yen as well. The US Federal Reserve’s (Fed) multiple rate hikes in the 16 months through July 2023 have pushed up bond yields, with the US 10-year government bond yield currently at 4.6%, up from 3.75% on 19 July. The spread between the US and Indian 10-year government bonds has narrowed to 2.6 percentage points from 3.32 percentage points on 19 July.

Typically, when the spread narrows, US investors tend to sell riskier emerging market assets to move to the safety of the dollar. This puts pressure on emerging market currencies like the rupee as foreigners repatriate dollars back home. Foreign portfolio investors (FPIs) sold Indian shares worth ₹14,768 crore in September, even as the rupee weakened to a low of 83.27 last month.

The other reason for the rupee’s weakening has been a widening of the trade deficit to a 10-month high of $24.16 billion in August from $20.7 billion a month ago, led by higher merchandise imports.

D.K. Joshi, chief economist at Crisil, expects the volatility in the rupee to increase, given the stronger dollar and chances of one more rate hike by the US Fed this year.

“Our base case is 83 to the dollar for the fiscal year-end,” Joshi said. “We will take a call on any revision to our forecast by October-November. Right now, there is a lot of noise because of a stronger dollar, temporal distribution of rainfall or oil breaching the $100 per-barrel mark. We feel the currency volatility could move up sharply in the near term.”

Madan Sabnavis, chief economist at Bank of Baroda, expects the rupee to close the fiscal year at 82.5-83.5 a dollar compared to 81-83 in April.

“The stronger dollar is pressuring the rupee, along with other currencies like the euro against which it has appreciated to $1.05 from 1.08-1.09 since the 20 September Fed meet,” said Sabnavis. “A further rate hike by the Fed and probable FPI outflows because of rising US bond yields could further queer the pitch for the rupee.”

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Updated: 03 Oct 2023, 12:14 AM IST