FxWirePro: Indian rupee gets cushion from crude, can RBI show swift action? USD/INR option trade tips

After a flat start, the Indian rupee is trading lower by 8 paise at 70.95 per dollar versus previous close 70.87. 

Well, Indian rupee has rallied robustly by nearly 5% since early October owing to the sharp 30% plunge in crude oil prices. When USDINR spiked to a record high of above 74 in early October as NYMEX crude oil prices climbed above USD75, India was bracing for the worst for a possible move towards the 80 mark. 

The situation was also complicated by the shockwaves in the shadow banking sector after the failure of one shadow lender. What a difference one month makes in the FX market. Oil prices plunged and RBI’s swift action with a bailout package for the shadow bank helped to contain the fallout. One may consider RBI to be fortuitous but they also created their own luck by their swift action. This also raises the point of the importance of an independent central bank, unencumbered by pressures from the government. RBI has been under pressure of late to do more to increase credit to the private sector and shore up growth ahead of next year’s general election. There were signs that RBI could be caving in to government pressure after it said in mid-November that it will consider relaxing lending criteria for banks and that it discussed the transfer of surplus reserves to the government. 

In order for INR to continue to rally or at least stabilize, some key ingredients include:

1) The stable oil prices; and 

2) The investor confidence, which will entail an independent RBI. 

For USDINR, it ticked up slightly yesterday towards 71. The psychological 70.00 level provides the immediate key support.

Trading tips: Sell USDINR 1M strangle vs buy 1Y ATM, vega neutral.

Currency Strength Index: FxWirePro's hourly USD spot index is showing 4 (which is neutral), while articulating at (13:15 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex