Bank of America Bullish on Rupee Despite Election-Led Volatility

(Bloomberg) -- Bank of America Corp. is holding on to its bullish view on the Indian rupee even as a gauge of future market volatility rises amid elections in the country.

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“Indian rupee’s implied volatility and skew in options markets have begun to reflect,” some risks from elections, strategists including Claudio Piron wrote in a note. Still, the rupee has stayed in a narrow range, with realized volatility near multi-decade lows, signaling expectations the central bank will shield the currency from sharp moves after the election results, they wrote.

Implied volatility in the one-month part of the dollar-rupee options curve crossed levels seen in the three-month maturity, inverting the curve. Volatility in the shorter tenor has risen steadily since the elections kicked off last month.

A lower-than-expected voter turnout in India’s elections has led to some consternation about the prospects of Prime Minister Narendra Modi’s Bharatiya Janata Party which is widely expected to win a third successive term. Election results are due on June 4.

The rupee inched up 0.1% to 83.22 per dollar on Wednesday, the highest since April 10. BofA sees scope for the RBI to let the rupee appreciate by 1%-1.5% to signal a positive market reaction if the election results point toward a stable government.

The bank has expressed this view with a so-called one-touch downside option on USD/INR with 82.5/USD strike, it said. One-touch options require the underlying asset to reach a specific price level within a predetermined timeframe.

--With assistance from Malavika Kaur Makol, Mark Cranfield and Ronojoy Mazumdar.

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