(Reuters) - The Indian rupee's narrow trading range against the dollar over the last three weeks may set the stage for a big directional move and a jump in volatility, analysts said.
The rupee has been tethered to a 82.40 to 82.94 range since Dec. 12, thanks to suspected intervention by the Reserve Bank of India and persistent demand for dollars.
The realized volatility on USD/INR has fallen to below 2%, the lowest since June 2022.
"The longer the narrow range prevails ... the higher is the risk of a big eventual break," said Anindya Banerjee, head research - fx and interest rates at Kotak Securities.
He pointed to an instance in the recent past when a narrow trading range was followed by a major slide for the rupee.
In September-October last year, the rupee fell from 80.00 to 83.29 in just a month after being held in the 79.50-80.00 range.
At the time, the RBI was suspected of selling dollars to prevent the rupee from falling below 80. The current scenario is similar, with traders saying RBI has been defending the 82.90-83.00 level. The rupee has repeatedly found support just under the 83 level over the last three weeks.
Banerjee reckons the risk on USD/INR currently look to on higher side, but recommends waiting for a break of 83 before building long dollar positions.
"Once 83 is taken out, traders will get in on the break out and importers who have being waiting for a dip (on USD/INR) will cover," said Jayaram Krishnamurthy, head of research and advisory at Almus Risk Consulting.
"Nothing right now points to rupee strengthening and preference is that it (USD/INR) should break up."
A derivatives trader at a private bank said that if the 83 level breaks, investors could see a swift move to 84 and buying out-of-money USD/INR call options was a low-cost way of betting on such an outcome.