Market Maniac

So Could the Rupee Tank Again?
Nov 05, 2015

The recent trickle lower in the rupee has people wondering whether we are about to see another sudden/sharp collapse in the rupee. I got a call last week from one of the smartest treasury heads I know who wanted to know – what else – my view on the rupee for end-March. This morning, I got a call from another very bright market analyst, again wanting to talk on the market and get my views.

Clearly, there is more uncertainty than usual, and certainly more than is reflected in the markets. This suggests that we may see a big move coming.

The first caller pointed out that domestic equity markets have been hovering in a narrow range for too long and, sooner or later, they are bound to break out. And (implicitly reflecting his bearish mood) since it is far more likely that they will break lower than higher, the rupee should decline sharply sometime soon. The second caller was more focused on the global market; he believes that most analysts are missing the importance of a major upcoming change – the structural shift in US monetary policy. He believes – and I agree – that the Fed will raise rates in December and – and here I’m not sure I agree – that it will continue to hike rates through 2016. He believes that US wages are rising fast enough to trigger inflation; core inflation is already close to the 2% mark. His conclusion is that the dollar will roar higher in 2016 and that the rupee will pay some of the price.

I humbly pointed out to both of them that all the logic in the world is no match for the inscrutability of markets and while I, too, would be less surprised if the rupee went to 68 rather than 61, I have learned too often that the market can “stay irrational longer than you can stay solvent.”

However, while you will never really know what is going to happen, it is important to watch the market and try and identify repeating patterns. For instance, over the past three or four years, the rupee has been following a path where it stays steady for a period, then falls suddenly and sharply, then recovers again, then falls again, and so on. Thus, if you are an importer, the trick is to stay unhedged (or with a small hedge) whenever the rupee is steady and exit when it is about to fall.

The bigger trick, of course, is being able to judge when these changes are about to happen, and while there is no way to know this for certain, we have developed an indicator that signals to a high probability when the rupee is likely to weaken and when it is likely to stay steady. The indicator is built around the observation that when rupee volatility is rising, it is usually a signal of some drama – meaning a weaker rupee – to come; conversely, when volatility is falling, it often signals a steady (to, sometimes, stronger) rupee.

I hasten to add that no indicator is foolproof but, on average and over a reasonably long test period, it has delivered good results, when used in combination with a structured hedging approach. We used two versions of one of our import hedging program, selecting the more conservative one (2.0) when the trigger signals danger ahead or the one with a lower hedge ratio (2.1) when the trigger suggested a calmer outcome.

The table below shows the results:

Clearly, toggling between the two versions of the program (depending on the volatility-based trigger) provided reasonably good savings. As compared to hedging fully on Day 1, the savings were 91 paise, which translates to nearly 3% per annum, about 40% of the forward premium (or funding cost) on average. In absolute terms, it performed better, on average than any of a 100%, 50% or zero hedge.

Importantly, these results were achieved over a period that includes two dramatic depreciations – April to September 2013 when the rupee fell from 54 to 62 and April to September 2015 when it fell from 62 to 66. The program was able to exit early during the first dive, but wasn’t able to catch it too well in the second. In most of the other periods, it maintained a high open ratio so was able to come close to – and on occasion do better than – the unhedged rate.

So, coming back to the fundamental question, the rupee may well take another tumble – there is the Fed meeting in November, increasing political nervousness domestically, and, of course, myriad “unknown unknowns”. However, even if this does happen, I would bet that the rupee would recover quite quickly, as we have seen so many times before.

The trick is to be able to stay in the game without getting burned on either side.

( 6 People like this )

So Could the Rupee Tank Again?
Nov 05, 2015

Who's Left, What's Right?
Oct 26, 2015

A Birth In Europe, But No Cigar (For Markets)
Oct 15, 2015

Sep 30, 2015

Back to a Better Reality
Sep 28, 2015

What can you do about the rupee ?
Sep 08, 2015

Friday, Bloody Friday
Aug 24, 2015

Why China devalued the yuan
Aug 17, 2015

Enjoying the Rajan put
Jul 30, 2015

FX Market Report - July 31, 2025
Jul 28, 2015

It's not Greece, It's the Euro
Jul 09, 2015

So, what’s gonna happen to the Euro ?
Jun 23, 2015

And so it goes – but for how much longer?
Jun 10, 2015

Where will the rupee be in two years?
May 21, 2015

Why do companies invest?
Apr 27, 2015

Fear of convertibility
Apr 18, 2015

Reversing the backslide
Apr 13, 2015

A difficult transition
Mar 23, 2015

Of REER and other animals
Mar 12, 2015

Budget 2015 – A few rousing cheers
Mar 02, 2015

Is this a “correction” which I see before me
Feb 16, 2015

The challenges before AAP
Feb 09, 2015

Have I been wrong all along?
Jan 28, 2015

Three cheers for RBI’s rate cut
Jan 19, 2015

Storm clouds in 2015
Jan 14, 2015

Where is Henry Ford?
Jan 12, 2015

Call me Mr. Volatility
Dec 31, 2014

Modi ka magic ko kya hua?
Dec 22, 2014

Dancing to its own tune
Dec 08, 2014

Can we now stop worrying about oil prices?
Dec 01, 2014

Continuing foolishness on gold
Nov 19, 2014

From Ananda, with love
Nov 10, 2014

Using FX as a strategic management tool
Oct 27, 2014

A lesson for the regulator
Oct 13, 2014

Modi ka magic chalega kya
Sep 29, 2014

God reads my columns
Sep 15, 2014

Regulators always live in interesting times
Aug 28, 2014

Rajan and me
Aug 14, 2014

Asset-lite as a lifestyle choice
Jul 31, 2014

Bring on the lederhosen
Jul 15, 2014

Can one man be enough?
Jul 03, 2014

Live another day
Jun 19, 2014

Back to the pavilion
Jun 08, 2014

Rebooting AAP
Jun 05, 2014

Stay close to the exits
May 28, 2014

Stay close to the exits
May 28, 2014

We need heroism not heropanty
May 22, 2014

Fighting last year’s battle
Apr 29, 2014

Fighting last year’s battle
Apr 29, 2014

Burning money
Apr 15, 2014

How low can it go…
Apr 01, 2014

Stability? What stability?
Mar 18, 2014

Be careful with horses
Mar 03, 2014

Dear Prudence
Feb 17, 2014

Paradigms shifting
Feb 05, 2014

The revolution is being televised
Jan 15, 2014

Volatility is here to stay
Jan 06, 2014

Truly, a new India
Dec 10, 2013

It ain’t the market
Nov 25, 2013

A more Islamic world
Nov 13, 2013

Poker lessons
Oct 30, 2013

The rupee in 2030
Oct 14, 2013

Snakes and Ladders
Sep 30, 2013

Accountability and Governance
Sep 23, 2013

Ideal Boy Rides Again
Sep 10, 2013

Time to thank the "Speculators"
Aug 29, 2013

The only way out
Aug 19, 2013

Why companies don’t hedge
Jul 31, 2013

Circular reasoning
Jul 22, 2013

Vitamin G
Jul 09, 2013

The correct value of the rupee
Jun 24, 2013

Lessons in risk management
Jun 07, 2013

Waltzing Matilda
May 20, 2013

Managing Volatility
May 13, 2013

Selling India in America
Apr 30, 2013

Joy and hope in Cochin
Apr 01, 2013

How bad can it get ?
Mar 18, 2013

Love me tender
Mar 06, 2013

Special More-Than-26
Mar 01, 2013

A Real Currency War
Feb 18, 2013

Controlling Gold Imports
Jan 24, 2013

So, What’s with the Yen
Jan 11, 2013

A New Goa
Jan 04, 2013

As the Year Turns…
Dec 19, 2012

Meaningful Financial Innovation
Dec 10, 2012

To ECB or not to ECB
Nov 26, 2012

On to 2016!
Nov 08, 2012

RBI should Embrace Speculation
Oct 29, 2012

Congratulations, Eurozone
Oct 16, 2012

Havala, Politics and The Rupee
Oct 03, 2012

Champagne and Vada Pao – Again?
Sep 18, 2012

Sep 15, 2012

Measuring Business Margins Correctly
Sep 12, 2012

Is the Dollar about to weaken ?
Sep 03, 2012

The smart money’s on Obama
Aug 27, 2012

Making Money isn’t Supposed to be Easy
Aug 17, 2012

The Rupee Fan
Jul 31, 2012

I'll Do Anything...
Jul 30, 2012

How did Bankers Become Sexy?
Jul 19, 2012

Has a Serious Dollar Rally Begun ?
Jul 09, 2012

A Car Crash in Slow Motion
Jul 03, 2012

Measuring Sentiment
Jun 26, 2012

47 to 57 in 2012 – ha !
Jun 07, 2012

Who is tomorrow’s Narasimha Rao ?
May 25, 2012

When The Going Gets Tough…
May 21, 2012

Is The Euro Going Down?
Apr 27, 2012

Getting More Out of the FX Market
Apr 11, 2012

Nandan Nilekani ki Jai
Apr 02, 2012

The Conundrum of FX Borrowings
Mar 19, 2012

Those Glittering Assets
Mar 05, 2012

Global Turbulence – More to Come
Feb 17, 2012

A Near-Sure Thing
Feb 09, 2012

What was That Bearded Man Thinking?
Feb 06, 2012

The Anomalous Strength of the Rupee
Jan 23, 2012

Nothing Ideological About It
Jan 09, 2012

The FX Market In 2012
Dec 29, 2011

Party Time!
Dec 26, 2011

Dec 19, 2011

India Is Not Going To Hell
Dec 07, 2011

So What’s Happening To The Rupee?
Nov 28, 2011

Intervene Today; Deregulate Tomorrow
Nov 21, 2011

C’mon Mr. Cain
Nov 09, 2011

Keep On Praying
Oct 31, 2011

Acting Lessons for RBI
Oct 17, 2011

A Brave New (Globalized) World
Sep 29, 2011

A Different Kind of Fool
Sep 23, 2011

European Football and a Dollar Rally
Sep 16, 2011

Will The Collapsing Euro Save Itself
Sep 12, 2011

Making Hedging Markets More Effective
Sep 05, 2011

The Anna Effect and Other Joyous Animals
Aug 29, 2011

Betting on a Range-bound Rupee
Aug 22, 2011

Shoot the Messenger
Aug 08, 2011

Benchmarking Treasury Performance
Aug 02, 2011

Betting on a Range-bound Rupee
Aug 01, 2011

Lesson From My Father – Redux
Jul 14, 2011

Welcome to Turkey
Jul 08, 2011

Has RBI Lost Control of the Rupee
Jun 27, 2011

Managing Raw Material Price Risk
Jun 06, 2011

Third Time Lucky?
May 30, 2011

Light Up and the Bus will come
May 09, 2011

Time To Fast-track Full Convertibility
Apr 25, 2011

A Tribute to Sarah Wells
Apr 08, 2011

Three Birds With Two Stones
Mar 18, 2011

Another Step Towards a New Islam
Mar 11, 2011

Feb 28, 2011

Another Step Towards a New Islam
Feb 22, 2011

Don’t Arabs Love Gold Any More?
Feb 08, 2011

Thank you, Anish Kapoor
Jan 28, 2011

Faint Heart Never Won Fair Lady
Jan 25, 2011

Beyond the Inflexion Point
Jan 07, 2011

Visibility: Poor
Dec 30, 2010

India 2030: May The God Of Your Choice Bless You
Dec 06, 2010

The New G-7
Nov 26, 2010

Thoughts From Turkey (and Elsewhere)
Nov 16, 2010

Takeaways From the 2nd Quarter Review of Monetary Policy
Nov 03, 2010

The Rise of a New Europe
Oct 25, 2010

(Another) Lesson From the Past
Oct 08, 2010

The OTC FX Market – Falling Behind the Curve
Sep 24, 2010

Unnatural Hedging
Sep 03, 2010

Smile Darlin’, It’s Better Than You Think
Aug 23, 2010

Do You Believe in Empirical Evidence?
Jul 30, 2010

Could the Rupee Hit 50 Again?
Jul 22, 2010

Higher Volatility Ahead?
Jul 14, 2010

A Return to Values?
Jul 01, 2010

Don’t Cry for Me, Maradona
Jun 21, 2010

Could the World Cup Trigger a Correction in the Euro?
Jun 11, 2010

The Next Cycle
Jun 02, 2010

I Hate to Say It, but…
May 24, 2010

W(h)ither the Euro – a Fable
May 05, 2010

Could the Euro Go into Long-term Decline
Apr 09, 2010

Enabling Better Profits for Small Exporters
Apr 05, 2010

Shades of Enron
Mar 22, 2010

Bt or Not To Be
Mar 16, 2010

Post Budget: A New Paradigm
Feb 26, 2010

Budget Ideas for The Financial Sector
Feb 19, 2010

Time For More Aggressive Regulation
Feb 03, 2010

American Breakfast
Jan 25, 2010

The CAG handicap
Jan 11, 2010

Bringing Hedgers to the Futures Market
Dec 30, 2009

The Major Currency Risk In 2010
Dec 16, 2009

God Bless You, Mr. Obama
Dec 11, 2009

Dear Mr. Bhave (and Dr. Subbarao)
Dec 03, 2009

Has RBI been diversifying out of dollars?
Nov 16, 2009

Welcome To Vegas
Nov 02, 2009

Rabbit in the headlights – again
Oct 09, 2009

The calm after the storm
Sep 25, 2009

Sufferin’ Art
Sep 11, 2009

Is it time to hedge your interest rate risk
Aug 31, 2009

Unconventional wisdom
Aug 31, 2009

A gift for the chairman's wife
Aug 17, 2009

Surf’s up!
Aug 01, 2009

Dr. Subbarao As Tiger: 25% Visibility, 75% Ability
Jul 28, 2009

Coming of age
Jul 20, 2009

Thoughts on the budget
Jul 09, 2009

Guinness is good for you
Jul 02, 2009

Will it rain the day after tomorrow?
Jun 08, 2009

Cleaning the Augean Stables
May 19, 2009

Bali Hai
May 14, 2009

Another exotic bet
Apr 27, 2009

Buy US corporate bonds
Apr 24, 2009

Mumbai chi Meera
Apr 13, 2009

Turning around cautiously
Mar 30, 2009

The curious role of the forex committee
Mar 16, 2009

Green shoots
Mar 02, 2009

The Party Party
Feb 16, 2009

Obama is Jamal
Feb 02, 2009

Who do you trust?
Jan 19, 2009

The New American Dream
Jan 05, 2009