India unveils tough curbs on dollar demand to defend rupee

Mumbai - India's central bank, the Reserve Bank of India (RBI), has taken additional steps to bolster the value of the rupee on Saturday, following the currency's near-record low. In response to the rupee's decline, the RBI has opened a special window to cater to the daily dollar needs of three government-owned oil marketing companies, namely Indian Oil, Hindustan Petroleum, and Bharat Petroleum. This move aims to alleviate pressure on the foreign exchange (FX) market.

Under this arrangement, the oil companies will be granted dollar access directly from the RBI's foreign exchange reserves starting Monday. Forex dealers will not permit users to rebook any foreign exchange derivatives, according to the RBI. In an effort to mitigate currency risk, the central bank has reduced the limit for positions in currency derivatives involving the rupee from $100 million to $5 million.

Furthermore, the RBI has instructed forex dealers to maintain a foreign exchange risk reserve equal to 20% of the notional amount of each derivative contract involving the rupee. Despite the central bank's efforts to strengthen the rupee through various measures, including raising policy rates, the currency has struggled to regain its footing. On Friday, the rupee closed at 96.73 per dollar, only slightly fluctuating from its previous close and hovering near its all-time low of 96.96, which was recorded in May.

On Saturday, the rupee showed a slight improvement in the non-deliverable forward market, with the one-month dollar/rupee contract falling by approximately 40 paise in light trading. However, analysts suggest that addressing the oil companies' dollar requirements has alleviated one major source of demand from the FX market, which should contribute to reducing volatility. Nevertheless, this action will result in a reduction of the RBI's reserves, as noted by Dhiraj Nim, an FX strategist at ANZ Bank in Mumbai.