Currency Options USDINR: February series

January series for currency option expired on 29th January. My sold 57 calls expired worthless (https://writingoptions.wordpress.com/2012/12/28/currency-options-usdinr-january-series/). INR has appreciated since the start of February series on the back of consistent FII inflows. Globally also there is risk-on rally going on currently. I am a bit skeptical about the INR rally beyond 53 levels. RBI has increased FII debt limit by $5 billion each in certain debt instruments. Total of $ 10 billion is expected to flow in Indian debt market. This might result in some amount of appreciation in INR. But I don’t expect INR to appreciate beyond 52 levels on account of high current account deficit (CAD) numbers. Brent crude oil has also slowly and gradually moved to levels of $118/barrel. February series has an important event in terms Union Budget to be presented on 28th February. Technically, it is after the expiry of February series on 26th Feb, so it should impact March series. Good budget on fiscal front should result in some FII inflows and INR appreciation.

I sold a few 52 puts and 57 calls for February series. I have squared off 57 calls but 52 puts are still open. I am looking to rollover my sold puts to March series on any INR appreciation.

 

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Happy New Year 2013

Happy New Year 2013 to all. I hope that 2013 turns out to be happy and prosperous investing & trading year for all.

What sea-change can a year bring to the mindset of people. Start of 2012 was full of bearish predictions and opposite holds true for 2013. Lot of analysts are bullish on Indian Equity markets in 2013. With Interest rate cuts from RBI round the corner in its January meet, 15% returns expectations from Indian equity markets seems reasonable. Key risks would be Inflation remaining under control, Government of India acting on worsening Fiscal deficit situation. Fiscal deficit has already touched 80.4% of the budgeted target for full FY13. Yesterday released Current Account Deficit (CAD) numbers for Q2’FY13 also look shockingly bad at 5.4% of GDP. This is much higher than 4.2% CAD of Q2’FY12 and 3.9% of Q1’FY13. Poor CAD numbers should keep INR appreciation in check in 2013 despite strong inflows. Union budget would also be the key for equity markets in 2013. If GoI presents good budget with no sharp increase in subsidy and indication of tough measures on fiscal front, markets should see good inflows and continue their upward march.

I am expecting good returns from my equity holding of Ruchira Papers. It is a small paper company based out of Himachal Pradesh (H.P.). Given its financial performance in first half of FY12-13, it looks undervalued and I am expecting 50-60% returns in next 6 months.

I am also positive on Eros International which is into movie production and distribution. I had entered into eros at 162 odd levels and realized some profits at 205 levels.

My First Currency trade

In one of my previous post https://writingoptions.wordpress.com/2011/09/10/currency-options/, I had written about USDINR depreciating to levels of 47. But the move from 47 to 48 was swift and sharp. I think RBI might have intervened in the market at 48 level. India runs current account deficit and to fund that deficit, it need capital inflows. Due to global turbulence, capital inflows have slowed down. It presents Balance of Payment (BoP) problem.

Everything against USD is weakening, not just INR. But INR has been the weakest of the lot among Emerging Market (EM) currencies. Dollar Index (DXY Index) had touched the levels of 77. I entered my currency trade (shorted USDINR) at 48 level. I was confident that due to sudden movement, RBI might intervene at those levels. But overall situation is quite fluid and INR might depreciate further in case of bad news flow from Eurozone. I covered my short positions intraday after RBI intervened and INR moved to 47.85.

Currency Options : USDINR

NSE had launched exchange traded options on USDINR in October, 2010. Each contract lot size is 1000 USD. During my daily work at office, I do track currencies. So, it was natural for me to expand my trading options from equity to currencies. For quite some time, I have been trying to understand demand supply factors of currency market, primarily USDINR. INR has been relatively stable currency in last 10 years except for some time during 2008 crisis when it crossed 50 per USD. In 2007 also on account of large inflows, rupee appreciated sharply and breached 40 levels. Otherwise 10 years average has been around 45 level.

RBI has consistently maintained policy stance that it will intervene only when there is spike in volatility in currency markets. I remember RBI intervening in 2007 when there was a lot of hue and cry from exporters about sharply appreciating rupee and their eroding margins due to this. In the last few weeks, INR has been depreciating continuously on account of dollar buying from oil importers to settle Iran oil bill, FII outflows from equity markets and most importantly risk aversion among investors. Dollar still remains most important currency and in the short-term, risk aversion lead to capital flight from EM’s and riskier assets to US treasuries. Benchmark 10 year yield in US has dipped below 2 percent on account of flight to safety, despite US sovereign rating downgrade by S&P. Sometimes news reports say, “INR fell today on account of EUR weakness”, I am not able to understand this because when I check USDINR and EURUSD correlation, it is only 0.3.

Currently there is panic across the world, but once things settle down there will be capital inflow into Indian equity market. India’s current account deficit was USD 5.4 billion in Q1 FY12. Capital outflows coupled with current account deficit is putting pressure on INR. But if world economy slows down if not recession, as widely expected, then oil prices may come down. This would be very favorable scenario for Indian equity market and INR. Most of the Asian currencies have also depreciated, but INR has depreciated relatively more as compared to its Asian peers. In the short-term INR may depreciate some more, may be to levels of 47. I was on wait and watch mode till now and was waiting for panic levels. I think the time to enter into INR is coming soon. Again, I will enter through options. Each USDINR option contract require a margin of INR 1000.