RBI's rupee defence may drain banking liquidity, ease currency pressure
RBI has introduced measures to curb rupee volatility, which could ease immediate depreciation pressures in the currency market. These measures include limiting foreign exchange derivative contracts and increasing hedging costs for importers. Experts predict that these actions may lead to a reduction in USD/INR rates and forward premiums. However, external factors like crude oil prices may still…
Measures taken by the Reserve Bank of India (RBI) to control currency fluctuations may lead to a decrease in banking liquidity, according to recent research reports. The RBI's actions, such as establishing a dedicated dollar window for oil marketing companies and raising costs for certain foreign exchange hedging transactions, aim to diminish dollar demand in the spot market and alleviate speculative positions against the rupee.
A favorable reaction on the Indian Rupee (INR) is anticipated, potentially causing the USDINR rate to fall towards sub-95. Forward premia is also expected to decrease due to containment of hedging activities by Oil Marketing Companies (OMCs) and other importers. However, the long-term trajectory of the currency will depend on global factors and balance-of-payments dynamics, according to IDFC FIRST Bank.
The RBI's decision to prohibit authorized dealers from rebooking cancelled rupee-linked foreign exchange derivative contracts, while allowing rollovers under existing regulations, may contribute to a near-term decline in USD/INR and lower forward premiums. Additionally, the Foreign Exchange Risk Reserve (FERR) requirement, which mandates authorized dealers to maintain 20% of the rupee equivalent of notional amounts exceeding USD 2 million, could discourage some importers from hedging currency exposure, further reducing dollar demand and easing forward premiums.
Nonetheless, the relief to the rupee might be limited if external factors persist, such as high crude oil prices, foreign portfolio outflows, and weak capital flows. The RBI's liquidity operations and open market bond sales could also impact the availability of core liquidity surplus in the near future.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
