Indian rupee slips, muted price action sinks volatility expectations to five-month low

MUMBAI: The Indian rupee ended modestly weaker on Thursday, weighed down by dollar outflows linked to derivative maturities and overseas debt repayments, while the central bank’s frequent interventions continued to drive volatility expectations lower.

The Indian rupee closed down 0.1% at 95.44 per dollar, with its 1-month implied volatility, a gauge of future expectations, easing to 4.2%, the lowest since early March.

The currency’s implied volatility has retreated from a little over 5% at the start of the month as the central bank’s frequent interventions kept a firm lid on losses, deterring speculation on the South Asian unit.

The central bank has intervened in nearly every trading session this week.

“There is little inclination to sell it (USD/INR) at the moment given oil risks while sitting on bid yields thin results, unless one captures opening gap-up or down moves,” a trader at a foreign bank said.

Brent crude oil futures were down 1.7% on Thursday as investors assessed prospects for weaker global demand this year even as prices found support from a lack of progress in talks over the blockaded Strait of Hormuz and disruptions to supply.

“The Gulf situation may regain some relevance for FX, in particular through the risk-sentiment implications of the Strait of Hormuz negotiations,” analysts at ING said in a note.

India imports nearly 90% of its crude requirements, making it one of the world’s most vulnerable economies to the Middle East oil shock. On the day, data showed that India’s merchandise trade deficit widened to $31.98 billion in July.

Economists had expected the deficit to be $30.20 billion, according to a Reuters poll, compared with a deficit of $30.43 billion in the previous month.