Mumbai: The Reserve Bank of India (RBI)’s new measures to curb speculation in the rupee and maintain stability in the foreign exchange market showed its impact on the rupee on Monday. The rupee opened at 95.76, up over one percent against the US dollar.
Following the central bank’s measures, the rupee also gained 2.7 percent in offshore trading. According to NDTV Profit, the rupee strengthened by 2.7 percent against the dollar in one-month non-deliverable forward (NDF) trading, reaching 94.17. However, its gains later narrowed to 0.7 percent.
The RBI has taken several stringent measures to support the rupee and control speculation in the foreign exchange market. These measures are considered among the most stringent measures taken by the central bank to support the currency since the 2013 “taper tantrum.”
RBI tightens foreign exchange derivatives trading
In early October, the RBI implemented new regulations regarding foreign exchange derivatives transactions. Under this, the limit for unhedged foreign exchange derivatives transactions was reduced from $100 million to $5 million. A 20 percent foreign exchange risk reserve (FERR) was also introduced.
According to the new directives, authorized dealers will no longer allow rebooking of rupee-denominated foreign exchange derivative contracts that have been cancelled with an authorized dealer after the issuance of the directive. This rule applies to both deliverable and non-deliverable contracts.
However, rollovers will continue to be permitted upon the expiry of the contract.
The RBI has also directed that authorized dealers must obtain a written declaration from customers hedging actual trading risk through foreign exchange derivative contracts involving the Indian rupee. The customer must confirm that the same trading risk is not hedged with another authorized dealer.
20% of the Foreign Exchange Risk Reserve
The RBI has also established a Foreign Exchange Risk Reserve (FERR). Under this, authorized dealers must maintain a cash reserve with the Reserve Bank for rupee-denominated foreign exchange derivative contracts entered into to hedge current account risk, with a notional amount exceeding $2 million, and in which the customer purchases foreign currency in rupees.
This reserve will be 20 percent of the rupee equivalent of the contract’s notional amount. According to the RBI, this amount must be maintained daily until the contract expires.
The central bank clarified that attempting to circumvent these rules by conducting multiple separate transactions will be considered a violation. Authorized dealers will be required to report FERR-related information daily through the Centralized Information Management System.
The directives issued under Circular 25 have come into effect immediately, while the FERR rules under Circular 26 will apply to contracts entered into after the issuance of the directives.
The RBI stated that these measures are aimed at strengthening discipline in the foreign exchange market, improving risk management, and maintaining market stability and transparency.
Special arrangement for oil companies, monitoring the 97 level
The RBI also announced several measures on Saturday. These include the launch of a special facility to meet the dollar needs of state-owned oil companies and a reserve arrangement for certain foreign exchange derivative transactions.
The central bank took these steps when the rupee had reached a record low of 97 against the dollar. Earlier on Wednesday, the RBI also raised interest rates and indicated that monetary policy could be tightened further if necessary.
Galvin Chia, Emerging Asia strategist at Societe Generale in Hong Kong, said, according to a report by NDTV Profit, that the need for multiple measures to save the rupee this year indicates that the RBI has been slow to take the first step in defending the rupee in the foreign exchange market.
According to the report, the rupee was expected to strengthen in the spot market when trading resumed on Monday. Analysts had expected the RBI to take steps to defend the 97 rupee level against the dollar.