(Bloomberg) -- Short-term implied volatility in the rupee has spiraled to the highest in nine months, suggesting mounting nervousness as India's weeks-long election enters its final stretch.
The one-week tenor spiked to its highest since August 2023 on Friday, before the publication of exit polls over the weekend. Moreover, a gauge of demand for bullish call options over bearish puts on the US dollar versus the rupee stood at the highest since 2022.
While Prime Minister Narendra Modi is widely expected to return to office, there's uncertainty about whether his party will be able to expand its majority. Stocks, bonds and the currency are likely to suffer a rout if the Bharatiya Janata Party disappoints, an election outcome that may stymie some contentious economic reforms.
“While markets have priced for some chance of INR weakening in the short-term, markets have not placed a huge probability on adverse election outcomes,” said Michael Wan, a currency strategist at Mitsubishi UFJ Financial Group Inc. “So there is meaningful weights that FX markets have placed on the INR strengthening as well post the event.”
Voting comes to an end on June 1, and exit polls are set to be published later that day. Investors can look to stock market futures and non-deliverable forwards for the rupee for any early market reaction on June 3.
The final election result is expected on June 4. Modi had set an ambitious target that the BJP and its allies would win 400 seats in the parliamentary elections, increasing the coalition's majority from more than 350 seats in 2019.
--With assistance from Ravil Shirodkar.
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