Indian rupee’s low volatility makes it an optimal carry candidate

MUMBAI: The Indian rupee’s low realized and implied volatility, thanks largely to the Reserve Bank of India’s regular intervention, makes it attractive for carry trades, according to analysts.

The rupee’s six-month at-the-money implied volatility is down to 4.5%, the lowest since 2008. The one-year has dropped to near 5.1%, matching its multi-year lows.

“RBI’s two-way intervention makes rupee different from other Asian currencies. While other Asian central banks do intervene, they do not keep the currency in this narrow a range,” Singapore-based Khoon Goh, head of Asia research at ANZ, said.

This “most certainly” makes the rupee a preferred choice when it comes to carry trade, especially with the downside on the rupee capped by the RBI at the 83 level, Goh added.

A currency’s volatility (vols) is an important consideration when putting on a carry trade. In a carry trade, investors look to profit off the interest rate differentials between two currencies.

Risks on Indian rupee seen on the downside in wake of yuan’s plunge

The rupee’s six-month implied volatility of 4.5% is among the lowest among major Asian currencies.

The six-month expected volatility of the offshore Chinese yuan is 5.8%, while that of the Korean won is above 9%. For the Indonesian rupiah and the Thai baht, it is at around 7.5% and 8%, respectively.

The Indian central bank is primarily responsible for implied vols plunging to levels not seen in more than a decade.

The RBI has regularly intervened on both sides to keep the rupee in a narrow range against the dollar, preventing spillover of episodes of uncertainty in the global market.

The 30-day realized volatility on the USD/INR pair has dropped to 2.5%.

The underlying volatility of the currency pair significantly impacts the eventual payoff on the carry trade. This is where the rupee has an advantage.

“The carry-to-vol ratio of the INR is amongst the best in EM (emerging markets),” Goldman Sachs said in a note. Further, it pointed out that India’s improved balance-of-payment outlook is another positive for the rupee.

“Although the RBI is likely to cap INR appreciation, in our view, the improved BOP outlook is supportive of the INR, making it one of the ‘good carry’ markets,” Goldman Sachs added.