Wagers on stronger Indian rupee grow on dovish Fed outlook, yuan rally

Betting on a near-term rise in the Indian rupee has become costlier than wagering on its fall in the options market for the first time in six months, signalling a shift in investor sentiment driven by expectations of faster U.S. rate cuts and a rally in the Chinese yuan.

In a rare occurrence, the implied volatility on a 1-month at-the-money dollar/rupee put option is now higher than that on a call, signifying that investors are willing to pay more for betting on a rupee rally than a decline.

Investors have paid more to wager on a rise in the rupee only on six occasions over the last three years.

The rupee, alongside its Asian peers, is benefiting from a "very risk-positive set up" following the Federal Reserve's jumbo rate cut and stimulus measures by China, Brad Bechtel, global head of foreign exchange at Jefferies, said.

Jefferies' clients are "looking at the higher yielding bucket" of Asian FX to take long bets on, Bechtel said, referring to currencies like the Indian rupee and the Indonesian rupiah.

The situation for the rupee was quite different until about one-and-a-half months ago, when it appeared likely to depreciate past 84 and dollar/rupee calls were priced higher than puts.

The Reserve Bank of India's defence of the 84 level, a larger-than-usual rate cut by the Federal Reserve, and the yuan's recent gains have helped turn the tide.

The shift in the rupee's outlook has been "quite meaningful", bolstered by a pickup in portfolio inflows, a senior trader at a foreign bank said.

Overseas investors have net bought $10 billion of Indian stocks and debt in September, the highest monthly inflow of 2024.

The rupee has risen 0.2% over September so far, after posting two consecutive months of decline.

However, the trends in the rupee options market have already played out for other Asian currencies.

For the Chinese yuan, for instance, the difference between the cost of dollar/offshore yuan put options and the cost of call options is much higher than that for rupee options.

"To the extent that China lets their currency appreciate, the rest of the region will track that," Jefferies' Bechtel said.

While the big risk hanging over the markets is the U.S. election in November, the next four weeks are expected to be a "pretty good backdrop for risk", which should lift currencies like the Indian rupee, he said.