FIIs have poured in over USD 1.7 billion in the debt segment over the month of Feb. We had argued a couple of months back, that low volatility in the local unit can encourage speculative inflows in the debt segment, especially at the shorter end. With Indian short term yields around 8-9% and G7 money market rates at 1% or below, a sub-6% annualised volatility makes the local debt paper attractive for offshore specs, who are looking to earn carry for the short term. However, there is no free lunch in financial markets and hence, if due to exogenous or endogenous factors, rupee becomes excessively volatile, then a major part of the current short term inflows can reverse on short notice.
Over the near-term, we continue to see a ranged activity in the Indian rupee. With ongoing stress in the Chinese financial system and the economy, we expect a pick up in volatility in the coming weeks. As a result, we would advise importers to consider hedging some of their next 2/3 months exposure on dips between 61.40/85 levels on spot. However,US dollar needs substantial deterioration in the risk sentiment for it to breach the 62.50/70 barrier on spot and move towards 63.30/50 levels.
By Anindya Banerjee, analyst, Kotak Securities