By Nimesh Vora and Jaspreet Kalra
MUMBAI (Reuters) -Offshore investors are using options to position for a potential rally in the Indian rupee, encouraged by Wall Street banks promoting strategies built
on the prospect of a trade deal between the United States and India.
Over the past two weeks, several banks have floated trades linked to a stronger rupee, with Citi and Goldman Sachs among those recommending such wagers.
Citi, in a note last week, suggested a three-month options trade that bets the rupee could rise to at least 87 per U.S. dollar, with a potential upside towards 86.5.
"An actual culmination" of a U.S.-India trade deal could inject positivity, while the rupee's relative valuation has turned supportive, Citi said.
Goldman Sachs has proposed a longer-term bet that stands to benefit from a rupee rally while expecting the currency's rise will be limited to 85.50.
The bullish recommendations come even as the rupee has spent the last two months languishing near its all-time low of 88.80 and avoided steeper losses largely due to frequent central bank interventions. It was last at 88.45 at 1 p.m. IST on Wednesday, up 0.2% for the day.
Societe Generale also reinforced the optimism, saying in a November 6 note that the tide was turning for the currency.
Offshore investors have responded by piling into trades favouring a rupee recovery.
"These trades have been coming through consistently over the last fortnight," said a portfolio manager at a Singapore-based hedge fund. "Offshore flows are definitely skewed towards upside structures (on the rupee)."
A Mumbai-based currency derivatives trader confirmed a pickup in options activity from two U.S.-based and one UK-based lender, which he attributed to offshore investors betting on a stronger rupee.
Options market data reflects the optimism, as bets on a rising rupee are currently more expensive than those that wager on its fall.
The one-month dollar/rupee risk reversal stands at -0.7 and the three-month at -0.4, indicating traders see better odds of the rupee climbing.
Signs of a potential trade deal from U.S. and Indian officials have further buoyed sentiment. U.S. President Donald Trump said last week that an agreement is "coming soon" and that tariffs on Indian goods would be cut "at some point."
(Reporting by Nimesh Vora and Jaspreet Kalra; Editing by Sonia Cheema)
