How to trade the USDINR when the rupee is at Rs.73.448/$?

Currency traders are likely to be a harried lot in the last month or so. The rupee had weakened to about Rs.74.60/$ just a month ago. However, there was a rapid bout of strengthening of the rupee all the way to Rs.72.90/$ before the rupee has once gain weakened to Rs.73.448 as of 15-Sep. The question is; what should currency futures traders do in this kind of volatile currency situation.

Let us first understand the story behind this volatility. Towards the middle of August, it was becoming increasingly clear that the US may consider taper later this year but rate hikes were ruled out. This led to a fall in US bond  yields while the yields in India remained elevated at around 6.2% against 1.27% for the US. This wide rate gap was an incentive for debt flows into India, which strengthened the INR.

However, the Indian economy cannot support a very strong rupee as the fiscal deficit is still high at around 6.8% of GDP and the government borrowings are at an all-time high level. The RBI also would not be too keen to let the rupee strengthen as it would hit the competitiveness of Indian exports.

How to trade this rupee story?

For now it looks like a broadly range-bound trade. The INR could be rangebound for now in the range of Rs.72.80/$ on the stronger side and around 74.20/$ on the weaker side. Around the levels of Rs.74/$, it would be ripe to sell the USDINR as the huge rate differential between Indian benchmark bonds and US benchmark bonds would strengthen the rupee with heavy debt market flows.

However, at below Rs.72.90, it would be a good scenario to go long on the USDINR since the steep fiscal deficit and high borrowing pressure of the government would be key factors weakening the rupee. It is the time for a range-bound trade on the rupee. Of course, since there are multiple factors impacting the rupee/dollar equation, it would be advisable to trade with a stop loss.