Rupee Rallies, Premiums And Volatility Expectations Fall After US-Iran ceasefire

INR Vs USD: The rupee rose on Wednesday, while forward premiums extended their slide and volatility expectations fell on the back of a plunge in oil prices and upbeat risk appetite following the Middle East ceasefire.

The rupee was trading at 92.62 per U.S. dollar at 9:40 a.m. IST, up from 93.0075 on Tuesday. The one-year implied rate on the dollar/rupee forward fell 24 basis points to 3.08%, extending its decline to nearly 90 bps from Monday’s multi-year high.

Meanwhile, one-week volatility expectations dropped to about 8%, after spiking to over 12% earlier this week.

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The agreement between Iran and the United States on a two-week ceasefire triggered a near 14% drop in Brent crude prices, providing relief to the rupee and other Asian currencies. Israel backed the two-week pause on Iran strikes.

The ceasefire helped revive investor appetite for risk assets, lifting U.S. equity futures by about 2.5%, while Indian equities jumped 3.6%.

The ceasefire will be a major relief for markets, which over the past several weeks have had to contend with uncertainty over how long the conflict might drag on and the potential impact on inflation.

The agreement was reached less than two hours before Trump's deadline for Tehran to reopen the Strait of Hormuz or face devastating attacks on its civilian infrastructure.

"These negotiations and a pulling back from the brink is certainly a positive including for Asia which has been and continues to be disproportionately hurt by a Strait of Hormuz closure," MUFG Bank said in a note.

RBI MPC Decision

The ceasefire comes ahead of the Reserve Bank of India's policy decision at 10 a.m. IST.

The central bank is widely expected to keep rates on hold, with the recent run-up in oil prices stoking inflation concerns.