Wednesday, July 5, 2017

mein seeress toh nahin (and all that gyaan)

In this week, I have been asked often my view on INR.  It’s an occupational hazard but this week it’s been more than usual.  In my opinion, it is a sign (not from up above but from the market). When the pair gets whacked around, it is another story.  However when it’s been in a tight range for fairly long and people begin to worry instead of slipping into complacency, that should tell you something.

I did a quick analysis of USD/INR movement in the last one year. Apr-Jun quarter has been the quietest, trading in a range of less than 1.5%. In the preceding two quarters INR has moved in the range of 3.5% and 5% and one-year range (Jul ’16 - Jun ’17) has been close to 7% (68.76 and 64.05).

With dollar index doing it’s own number and EUR and GBP showing rare resilience, we are likely to breakout of this tight range that Rupee has been hovering in, fairly soon. While I would peg the next range to 64-66, who is to say where it would be tomorrow, leave alone 6 months down the line?

Given the nature of the beast and current low volatility, those with exposure to USD should look to hedge. Both exporters and importers should take note that forward premium settled around 4.5% (from a 1 year range of 3.75% - 6%), makes it accessible and fairly attractive for both sides.  

For instance, 3 months imports would cost close to 65.50 and 1year exports would fetch 67.75.  For the purposes of hedging, both the above seem safe to me. I haven’t seen very many importers hedging longer than 3 months and the forward rate today isn’t prohibitive at all.  From my personal experience, shorting dollars for 1year (or longer) has not been a loss-making proposition. Also reasonable carry that is available, helps bring down the overall cost of borrowing. 

Going back to the start, I don’t know where the Rupee will be – tomorrow, next quarter or next year.  The only reality is it’s a risky business and monkeying around never helps. Identify risk and manage it proactively – is the only way to do it.

I am reading Mark Twain currently, so will leave you with one of his gems:
“Prophecy is a good line of business, but it is full of risks”

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