Volatility in the Indian rupee has increased in the month since the change of guard at the Reserve Bank of India, and analysts believe the central bank will take a softer approach to managing the exchange rate.
Since Sanjay Malhotra, a career bureaucrat, took charge of the RBI on December 10, replacing Shaktikanta Das, the rupee has fallen by more than 1% against the dollar and indicators that measure its volatility have increased slightly.
The one-month realized daily volatility of the dollar-rupee pair reached a near six-month high at the end of December, while implied volatility, which measures future expectations, reached 3.5%, its highest level since August 2023.
One-month realized volatility had reached its lowest level in more than 20 years in mid-2024.
Analysts say this period of tranquility is unlikely to be repeated, with the central bank’s ability to intervene in foreign exchange markets being undermined by numerous adverse factors.
“The RBI has shown greater tolerance towards a lower INR over the past few weeks. We believe the RBI will now use its ammunition more judiciously given the high level of uncertainty “, Standard Chartered Bank said in a note on Friday, lowering its forecast for the rupee to 86.25 by March 2025, from 84.50 previously.
ANZ Bank is more pessimistic and forecasts the rupee falling to 88 by March, while stressing that “greater flexibility (for USD/INR) is inevitable.”
Calls for greater flexibility and a weaker rupee come as India’s foreign exchange reserves have fallen by more than $64 billion from their record high in September, due to persistent selling interventions of dollars.
The rupee was marginally weaker at 85.88 against the US dollar on Friday, after sliding to an all-time low of 85.9325 in the previous session.
Operators are already sensing the change, with many citing a “tactical change” in the RBI’s mode of intervention.
While the central bank “stubbornly defended the levels before, it appears to be focusing more on preventing uncontrolled moves while allowing wider intraday ranges,” said a senior trader at a state bank.
