What’s Driving Rupee - Fundamental or Market Positioning !!!

Rupee made a new low again today and closed at 90.78. It has kind of become a puzzle for everyone - why it is getting singled out despite not so bad macros. Many of market experts are attributing this to rising trade deficit, FPI outflows and uncertainity around trade deal.

But the way, I am seeing, trade deficit or FPI outflows or trade deal are small part of the problem. Bigger issue seems to be central bank large short forward book ($63 billion as of Oct end) and market testing central bank resolve to defend rupee on days when these forward position come to maturity.

On such days, RBI can do two things - either it gives delivery of dollar against its short forward position or roll-it over. But if it gives delivery, it impacts liquidity and in turn nullifies its own effort to keep sufficient liqudity in the system. Then the only option left out with, is rolling-over the position to next maturity, and thats where rupee gets in a downward loop. These roll-overs or what we call fixing related demand, pulls USDINR up.

So, as per my understanding, what we are seeing in rupee is largely on account of market positioning than actual fundamentals. There is no denying that macros are getting softer below the surface but not so weak that it warrants such a move. In nutshell, trading USDINR is now more about tracking the forward maturity date and concomitant fixing related demand, and guessing what central bank is likely to do.