Authors: Nimesh Vora and Jaspreet Kalra
MUMBAI (Reuters): The period of low volatility enjoyed by the Indian rupee may not last with Donald Trump set to re-become U.S. president, bankers and advisers have warned, urging companies to be more cautious and proactive in managing currency risks.
The rupee fell to an all-time low of 84.3625 per US dollar on Thursday, extending losses from the previous day as the election result sent Asian currencies tumbling.
Investors are abandoning Asian currencies and the dollar is gaining ground against its main competitors on bets that Trump’s expected policies of corporate tax cuts and deregulation will spur U.S. economic growth.
Additionally, Asian currencies face the possibility of Trump raising tariffs, especially on China.
All this is likely to mean a period of greater uncertainty and volatility for Asian currencies, bankers said, adding that the usually subdued Indian rupee will not be immune to the disruptions that Trump’s policies are likely to lead to.
The rupee “is likely to enter a period of slightly increased volatility, with the risk of larger moves in the coming months,” Abheek Barua, chief economist at HDFC Bank, said in a note.
For Indian companies, accustomed to the rupee trading in a tight band for an extended period of time, this will mean an adjustment in the way they manage currency risk.
The three-month daily realized rupee volatility this year has been in the range of 1-2.5%, well below the 10-year annual average of 5%.
Due to low rupee volatility, Indian importers maintain a relatively low hedge ratio and are “more willing to wait” until the due date, a foreign exchange dealer at a mid-sized bank said.
“This may no longer be feasible now that the perceived risk has decreased,” he said.
Companies should remain cautious and hedge short-term risks (for the next 3-6 months), recommends HDFC Bank.
Abhishek Goenka, founder and CEO of advisory firm IFA Global, said importers may opt for option hedging versus forward hedging, depending on their risk profile.
“Extremely conservative, we suggest that if you have confirmed the payment you want to make, you might want to consider a combination of options and forwards.”
