INR: Rupee Weakness Broadly Contained, Local Traders Warn of Complacency

While the rupee has weakened following the exchange of strikes between India and Pakistan, the move lower for the currency has been fairly contained, with ongoing inflows into local equities and the announcement of new measures from Chinese authorities to support markets helping to limit rupee weakness. USDINR 1-month NDFs spiked moderately higher as initial headlines of the strikes crossed the wires, though price action remains contained within its recent range. Meanwhile, the 1-month 25d risk reversal has spiked from a 7-month low to a 3-month high in the space of a day, indicating that it has become more expensive to hedge against rupee weakness.

• Spot USDINR has generally looked through rising India-Pakistan tensions with the RBI expected to intervene should there be any signs of disorderly moves. Today’s 0.5% move higher – albeit notable – has merely helped to pare last week’s decline, with the pair still over 2% lower compared to the April highs.
• The general lack of follow through into Indian assets (benchmark equity indices are little changed overall) suggests a degree of calmness as markets digest the news flow. Traders who spoke to Reuters say complacency might become a factor if the situation worsens.
• On the other hand, a protracted move higher in implied vols – 1-month USDINR vols showed at their highest since 2022 – points to worries over the potential for a further escalation, with Pakistan having termed India’s assault as a "blatant act of war."
• U.S. Secretary of State Marco Rubio said Washington would continue to engage the Asian neighbours to reach a "peaceful resolution," while a Chinese foreign ministry spokesperson said it finds India's military operation “regrettable.” Note that India procures the majority of its arms from Western nations while Pakistan relies more heavily on China (as per data from the Stockholm International Peace Research Institute).