Even if the rupee does enjoy some respite over the next couple of weeks—the one-month NDF is down a little bit—it is dangerous to believe that waiting and watching is a good approach.
With three of the last four weekdays closed for trading (local holidays), there was a concern that the rupee could open on April 6 with yet another terrifying gap down, particularly as the NDF was more than a rupee lower than the domestic market at one month. In the event, fortunately, the rupee opened a bit steadier, no doubt supported by stronger (?) global equity markets and a slowly strengthening belief that the worst of the coronavirus epidemic may have passed, at least in terms of numbers infected and death rates.
The accompanying graphic shows that the rupee has bounced off the support line that began at the bottom of the “taper tantrum” cycle in 2013. At the time, we suffered outflows of about $17-18 bn between May 21 and early September (incidentally, when Raghuram Rajan came in as RBI governor); the trauma was short-lived, and inflows started up again, and/or reserves were back to the May 2013 level in less than two months. This time, it has been much, much more severe.
Since the start of March, outflows have been approximately $18-19 bn, the same as during the entire taper tantrum; more importantly, it seems impossible that flows will start up again any time soon. RBI has, of course, been in the market (as it was back in 2013, and often since), but it is clear that the kind of sharp jump we saw in the rupee in 2013 is not happening. The question, however, is whether it can continue to hold its own around the current level, or, as it has several other times, drift slowly higher.
Oil prices are sharply down, which will favour the physical demand/supply equation; there may be prospects that global debt repayments may be deferred, which would give us some more breathing room. However, there is no way of judging what the real flow of exports and imports will be.
And then, of course, no one really knows whether the virus has, indeed, done its worst yet—indeed, the US, which has turned into the epicentre, is still getting worse every day, and for us in India, the extremely low numbers provide both a sense of comfort and uncertainty. Are we missing something? Could it be the BCG vaccine that has been mandatory for all children born after the 1950s that is protecting us?
Again, no one really has any measure of what the full economic impact of this world-changing event will be—it will certainly be negative in terms of global growth, so exports will fall, even if we are able to get our act together in terms of systems and process. Imports are more inelastic, so they should not fall as much (after the one-off sharp decline in the value of oil imports). All of this also augurs against a steady rupee.
Thus, even if the rupee does enjoy some respite over the next couple of weeks—the one-month NDF is down a little bit—it is dangerous to believe that waiting and watching is a good approach. Remember that even if volatility eases a bit, in tandem with global markets, the reality is that when the wild animal bolts again, it will be exactly that—wild. And, even though forward premiums have crept up a bit, it is worth noting that the average daily movement of the rupee has more than doubled over the past two weeks as compared to the last twelve months.
Basically, the market today is like a tsunami with after-shocks; normally, it is like the monsoon sea, which is why I always say, don’t fool around—cover your risk, either fully or with a strong systemic stop loss in place. For importers, that advice is doubled and redoubled in spades, hearts, diamonds and clubs; for exporters, keep your forecasting as tight as possible and ride the spot—you may want to sell a little bit (say, 10-15%) of unhedged certain exposure to three months.
Also, please take care of yourselves and all around you; the coronavirus is, truly, a “gift” from God if we choose to use it as such, and increase our caring for, sharing with and loving each other. Let’s talk.