The Reserve Bank of India (RBI) has announced a package of measures aimed at bolstering the Indian rupee, which has been trading near its all-time low against the US dollar. The central bank's actions are designed to ease pressure on the domestic currency, curb speculative activities, and reduce immediate dollar demand in the spot market.
On Friday, the rupee closed at Rs 96.73 per dollar, hovering close to its record low of Rs 96.96 touched earlier in May. Despite previous interventions and interest rate hikes, the currency has remained under significant pressure.
RBI Unveils Comprehensive Strategy to Support Indian Rupee
The RBI's new directives include a special dollar facility for state-owned oil marketing companies, stricter guidelines for foreign exchange derivatives, and a new cash reserve requirement for certain large transactions. These initiatives are expected to bring stability to the currency market.
1. Special Dollar Window for Oil Marketing Companies
Effective October 12, the RBI will directly supply US dollars to three major state-run oil marketing companies: Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL). This special arrangement will cover their entire daily dollar requirements.
India's significant crude oil imports make oil companies substantial buyers of foreign currency. By meeting their dollar needs directly from its reserves, the RBI aims to remove this considerable daily demand from the open foreign exchange market, thereby reducing volatility and pressure on the rupee. However, this strategy could also lead to a depletion of India's foreign exchange reserves.
2. Curbing Speculation: Restrictions on Forex Contract Rebooking
To discourage speculative trading, the RBI has instructed authorized dealers to disallow the rebooking of rupee-involved foreign exchange derivative contracts if the original contracts were cancelled after the new directions were issued. This restriction applies to both deliverable and non-deliverable contracts, though rollovers at maturity will still be permitted under existing regulations. The goal is to limit repeated cancellations and rebookings that contribute to currency market volatility.
3. Reduced Limits for Forex Derivative Positions
The central bank has significantly lowered the threshold for undertaking certain foreign exchange derivative transactions without requiring proof of underlying exposure. This limit has been reduced from $100 million to $5 million equivalent, and applies to positions in exchange-traded currency derivatives involving the rupee. This move seeks to ensure that large derivative positions are backed by genuine commercial exposures, such as import or export payments, rather than being primarily used for speculative purposes.
4. Introducing the Foreign Exchange Risk Reserve (FERR)
A new Foreign Exchange Risk Reserve (FERR) requirement has been introduced for eligible rupee-involving forex derivative contracts exceeding $2 million in notional value. Authorized dealers will now be required to maintain a cash reserve with the RBI equivalent to 20% of the rupee value of each qualifying transaction. This applies to specified contracts used to hedge current account exposures where the user is purchasing foreign currency against the rupee. The FERR is intended to raise the cost of these transactions, strengthen risk management, and discourage excessive positions.
5. Enhanced Documentation for Hedging Activities
To improve transparency and prevent duplicate hedging, authorized dealers must now obtain and retain a formal undertaking from users entering into specified forex derivative contracts. This undertaking must confirm that the same underlying exposure has not been hedged through any other authorized dealer.
The effectiveness of these measures in strengthening the rupee will depend on a confluence of broader economic factors, including global crude oil prices, foreign portfolio investment flows, and international dollar movements. India's foreign exchange reserves saw a decline of $12.95 billion in the week ending October 2, bringing them to $734.60 billion, approximately $51 billion below their record high in September. While the special dollar window may alleviate immediate market pressure, sustained rupee stability hinges on the overall balance of dollar demand and supply within the external economic environment.