Anindya Banerjee Currency Derivatives Researcher, Kotak Securities
It has been nearly 8 weeks that Rupee has been caught within a very low volatile range against the US Dollar. It has oscillated between 66.10 and 66.90 on spot, with most of the trading confined to an even shallower range of 66.30-66.70 levels, just 40 paise or 0.6%, over 50 days. I have talked about how historically the month of May generally sees a greater volatility in the currency pair. However, it is hard to find any definite trend across the world financial markets and even commodity markets. Therefore, though I remain of the view that US Dollar can scale higher levels against the Rupee in the coming weeks, but it is hard to say when that breakout in volatility may occur. No major central bank policies are scheduled till the monetary policy meeting of the US Fed. Indian monetary policy meeting is not expected to deliver any fireworks and none of the other major central banks too are expected to act this month. Therefore, the trigger has to be something that is not anticipated or expected, which would be the one that shifts volatility to a higher plane.
I have talked about the importance of “narratives” when understanding direction of asset prices in the financial markets. Yes it will appear complex to most and that has nothing to do with lack or abundance of knowledge of this part of our world. It is reflection that how artificial the process of price discovery has become. If I try and focus just on fundamental driver to understand markets and even forecast markets, I may be at sea most of the time. The narratives in financial markets is about how effective is the central bank’s control over the asset markets. Global economy continues to drag along in a low growth plane. Many pundits have tried explaining that using factors like high debt, low productivity and even technological displacement of work forces. In my opinion, the answer is a mix of all the three above and along with that the fact that central banks are overdoing everything, the rebalancing process could be getting prolonged. The easy money from the central banks could be keeping unwanted (zombie) enterprises alive, which in turn is leading to an unnecessary competition in the resource markets.