Rupee gained nearly 2% to 92.94 against the US dollar today, marking the biggest single-day gain since September 2013. This came despite broader market weakness and persisting FII outflows.
RBI’s fresh crackdown on forex speculation
The RBI on Wednesday barred banks from offering rupee non-deliverable forwards to resident and non-resident clients. Banks can still offer deliverable FX contracts for hedging, but users cannot offset those trades with positions taken offshore. The measures disrupted a $149 billion-a-day market in what analysts call the toughest measures in over a decade.The RBI also instructed banks not to allow clients to rebook any FX derivative contracts once they have been canceled. Additionally, banks were told not to undertake any FX derivative contract with their related parties.
This comes days after the Indian central bank put a limit of $100 million on banks’ net open rupee positions, down from board-driven limits of up to 25% of capital. After this, rupee had gained briefly on Monday, but soon lost steam and dropped to fresh record lows. This came as corporates began to exploit the arbitrage between the onshore and NDF markets as banks cut their positions.
Traders have usually used offshore derivatives known as non-deliverable forwards, and arbitrage trades i.e. buying dollars onshore and selling them in the NDF market, to build short positions.
Rupee’s free fall in March
Rupee saw a notable decline recently, falling over 4% in March to record its worst monthly drop in six years, as the raging war between Iran and US-Israel strengthened the safe-haven appeal of the US dollar and led to analysts questioning the possible macroeconomic impact on India. The Indian currency breached the historic 95-mark for the first-time ever during its free fall last week.
Analysts noted that RBI is trying to support rupee by putting restrictions on the most popular ways to bet against it. “RBI has further tightened rules on forex derivatives, requiring banks to close contracts in open markets by removing leeway to sell to corporates or clients. This can lead to (1) higher INR appreciation versus flat on Monday, (2) losses for banks being Rs 40-50 billion versus earlier estimates of Rs 30-40 billion,” Jefferies said.
“On the back of these rules, banks expect INR to appreciate,” Jefferies noted. “Still, we believe that sudden and retrospective changes to rules, while appropriate in the current extreme situation, may affect the depth of INR’s forex trading over the medium to long term,” it added.
(With inputs from agencies)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
