Volatility expectations, hedging costs ease as Mideast hopes bolster RBI's rupee steps

Optimism about peace talks between the U.S. and Iran is complementing recent central bank measures to shore up the Indian rupee, with a fall in hedging costs and volatility expectations signalling reduced anxiety over its trajectory.

U.S. and Iranian officials are weighing a return to Pakistan for further talks as early as the ‌coming weekend while ⁠the central ⁠bank's measures have diminished pressure on the currency by taking chunky arbitrage positions out of the equation.

Reflecting the impact, 1-month dollar-rupee NDF points - which bake in the cost of hedging against rupee weakness - have eased to about 37 paisa, down from nearly 100 paisa a week earlier.

Concurrently, near-tenor volatility expectations for the rupee have eased to their lowest level since early March.

The indicators signal that the ⁠market is ‌finding its footing after meaningful dislocations - on account of the slide in the currency and the RBI measures, traders say.

On Thursday, the ⁠rupee was little changed around 93.30 per dollar, but up 2% from a record low hit on March 30.

The spread between the 1-month onshore forward premium and 1-month NDF points has also eased substantially, reflecting the diminished anxiety.

"Offshore trades wagering on rupee weakness are likely being unwound, helping cool off the NDF points as the cost of holding these positions had risen quite substantially following the RBI's recent FX curbs," Dhiraj Nim, ‌an economist and FX strategist at ANZ, said.

Analysts say an improvement in trade and investment flows will be key for a sustained recovery as the rupee continues to face ⁠a widening current account deficit and weakness in capital flows.

Overseas investors have net sold over $19 billion of Indian stocks and bonds over 2026 so far and elevated oil prices threaten to lift India's current account deficit.

The combination of a wider current account and an underwhelming capital account would naturally weigh on the rupee, economists at Barclays said in a note.

The firm expects the currency to weaken to around 97.4 by the end of the first quarter of 2027.