Indian central bank curbs to temper corporate rush to hedge against rupee weakness

The Reserve Bank of India has introduced new measures to support the weakening Indian rupee, which may increase the cost of hedging against further depreciation, according to six bankers. The rupee has experienced significant losses this year, dropping nearly 7% and hitting an all-time low of 96.96 against the dollar last week. Despite a $140 billion infusion from special dollar deposit schemes and higher interest rates, the Reserve Bank of India faces challenges in stabilizing the currency.

To curb corporate demand for hedging, the central bank is asking banks to maintain reserves against large hedges and limit the practice of rebooking canceled rupee-linked derivative contracts. These measures could raise hedging costs by 80-150 basis points, depending on how much additional costs banks pass on to clients. Bankers are not authorized to discuss these changes with the media, citing anonymity.

Corporate purchases of forward dollars surged to a record $77 billion in September, up 80% from the previous year, while corresponding sales were more subdued at $41 billion. The RBI's curbs have caught market participants off guard, prompting rapid communication and meetings between treasury officials and corporate clients over the weekend. The steps to tighten corporate dollar demand have already spurred a rally in the rupee in New York trading hours, which is expected to continue after onshore markets open on Monday.