USDINR Ideas - Deja Vu - 25Mar17

Wow, what a market!!

First, it lulls you into hibernation with prolonged periods of sideways movements, and then suddenly, you get shocks of sharp rupee appreciation in small periods of time. Time and again, it proves all the market pundits wrong That leads to commonly debated questions (quite rightly so), ‘why forecast at all?’, ‘focus on business, not markets’, etc.

Well, BJP’s overwhelming victory in UP has silenced (or, is ‘eliminated’ the right word?) all the dollar bulls in the country. In the consequent euphoria, rupee soared 2% in 3 days. There are a few interesting things to ponder around the recent rupee surge:

1. After touching an all-time low of 68.8650 on 24 Nov’16, rupee recovered gradually to close at 66.60 on 10 Mar’17 (last working day before the election results were announced) – a handsome recovery of 3.3% in 3.5 months. Since then, rupee has gained a further 1.7%. As such, rupee is 5% stronger now than just 4 months back (quite unusual gains, isn’t it?).
2. Fundamentally, nothing has substantially changed in this period of time to warrant such sharp rupee gains. One should read between the lines to recognize who has driven this move – perception or reality.
3. Markets are discounting a scenario that BJP has already won the 2019 general elections – an event that has more than 2 years to go. BJP might, most probably, win – but believing that 2 years ahead will be a cakewalk for Indian and Global financial markets is a far-fetched illusion.
4. For the week after BJP swept UP, the total net FII inflows (debt + equity) were close to $2bn – rupee gained 1.7%. For the current week, the total net FII inflows (debt + equity) were again around $2bn – rupee gained a meagre 0.07%. Making sense?? 

In the beginning of calendar year 2014, Indian financial markets started getting a sense that BJP led NDA will come to power in May 2014. As such rupee started gaining as 2014 dawned. It surged from 63-64 to 58.30-58.80 in May’14. Observe the chart below. What happened to rupee in the next 6 months after BJP took office is common knowledge – it weakened back to 63-64.

BJP’s winning UP is akin to Modi’s re-election as PM. As such, rupee has gained from 68.00-68.50 to the current levels around 65.30-65.50. What will conspire in the next 6 months? Will history repeat itself – Deja Vu?? 

What to do now?

Importers: don’t think you will get a better level to hedge – rupee is at its strongest level since Oct/Nov15.

Exporters: consider doing USD Put options. Now is one of the best times to do it. Learning and executing options will certainly be worth the investment.