By Jamal Mecklai

It can’t be repeated enough but the market is like the ocean — nobody can truly comprehend it and, from time to time, it can throw up sudden squalls that send volatility shooting higher. This process can turn self-sustaining for at least some time, as people who are caught wrong-footed have to unwind positions and take losses. 

Over the last three months, rupee volatility (historic 100-day) has shot higher (to nearly 6%) from its 20-year low of around 1%, reached in November 2024. In the process, the rupee has bounced around wildly, hitting a low of nearly 88, recovering to 85, falling again to near 87 and then strengthening above 84 to the dollar, and is around 84.50 today.

While importers are shell-shocked, most exporters too were frozen in their tracks as decision-making in such a volatile environment became virtually impossible. Having been in the market for many decades, we understand this, which is why we have developed a structured programme for hedging based on simple rules. First, start with an initial hedge — no going into the market unsecured. Second, set a risk limit (RL), and if it is ever breached, hedge all exposures open at the time. Third, set a series of take profits (TPs) and hedge increasing amounts as each take profit is reached. The key, of course, is to follow the process with discipline without any reference to anybody’s market views. This is very difficult at the best of times, and close to impossible when the market is so volatile that all anyone can talk about is what’s going on with the rupee.

We have a client who has been following this programme for several years, has been complying with the rules reasonably well, and is quite pleased with the results so far. In January, when spot was 85.66 and the forward for June was 86.90, we set the RL for his June exports at 85.15 (his budget rate was 84, as I recall). He took an initial hedge of 20% and we had set accelerating TPs at 0.5% intervals. On January 13, by when the rupee had started to fall, the first TP (forward rate [fwd] of 87.34) was broken and he hedged a further 10% at 87.44.

The rupee continued to fall and he began to regret his hedge, and when the second TP (fwd of 87.77) was broken in early February, he decided to hold back. And sure enough, the rupee kept falling, and he congratulated himself.

But, when the rupee bounced back to nearly 85, he remained frozen, his discipline broken. He kept watching the market and, even when he got another opportunity near 87, he kept waiting for the nearly 88 spot level he had seen. And even now, when the market has obviously turned and his stop loss was hit, he remains frozen, stuck with only 30% hedged to date.

The tables show the programme parameters and the performance details. The programme would have had the exposure fully hedged at a rate of 87.59, 69 paise (0.8%) better than the zero risk value of 86.90. While it was 1.11 (1.27%) worse than the best rate that prevailed till date, it was a huge 2.95% better than the actual mark to market (MTM) that he was holding on to. And, while that is still ahead of his budget rate, he has not only lost a huge amount of opportunity but has also, no doubt, suffered a lot of tension trying to second-guess the market.

Going forward, the market remains hugely uncertain. The shocking sudden strengthening of the rupee last week was (apparently) triggered by huge stop losses being hit when the rupee inched above 85; this suggests that the equally shocking fall in the rupee prior to that was driven, at least to some extent, by large short rupee position-taking in the non-deliverable forward (NDF) market. On the other hand, global markets appear to be recovering from their Trump trauma (likely because he has walked back a lot on his tariff bluster), which, together with the Reserve Bank of India’s stern holding the line when the rupee climbed above 84(!), suggests that things may calm down a bit. Again, while rupee volatility has shot up in a straight line, historic comparisons suggest that the volatility surge may be exhausting itself.

In other words — and, as always, and more than ever right now — anything can happen. Be more conservative than ever, use a structured hedging approach, and follow it with discipline.

The writer is CEO, Mecklai Financial.

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