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The Reserve Bank of India (RBI) should be given some credit in exploring new avenues to manage the currency and market volatility. In the emergency meeting two weeks ago on 27-March, RBI slashed rates by 75bp to 4.40% and unveiled new measures to boost liquidity by up to USD50bn. What flew below the radar was the decision to allowed the local banks to participate in the once taboo offshore non-deliverable forward (NDF) market. It will be effective 1 June. The NDF market is often decried in Asia as a source of speculative volatility rather than just a mere hedging instrument. The NDF market is common for a number of Asian currencies that are not freely traded offshore, such as IDR and MYR. The authorities’ approach however differ across markets. For example, Malaysia prohibits local banks and those with onshore operations from trading in the NDF market. Indonesia on the other hand created the onshore NDF market to lure liquidity to within its borders.
India on the other hand is stepping into the offshore NDF market in what some view as RBI taking intervention to the offshore market. One advantage of this is that the market is settled in USD and it won’t have an impact on domestic liquidity. It is a bold step and one that exhibits confidence and willingness to let market forces play out. Given the surge in offshore INR activity, RBI is accepting the fact that offshore INR volatility could amplify volatility domestically, particularly in times of stress. RBI Governor Das said at the time that the time was right to remove the segmentation between onshore and offshore markets and improve the efficiency of price discovery. It is indeed early days but one has to wish RBI all the best in its endeavours.
Overall, the disconnect between global markets and FX vol pricing continues, with the latter displaying little reaction to the risk that Coronavirus turned into a pandemic.
Hence, for now, contemplating above factors consider: 1M At-Expiry-Digital (USDINR >2% OTMS; USDKRW > 2% OTMS; USDSGD > 2% OTMS) call @ 2.8/4.8% indicative.
1M ATMS worst-of basket USD ATM call on (USDINR, USDKRW, USDSGD) @ 0.225/0.275% indicative. Courtesy: Commerzbank
