Can RBI’s six forex measures help stabilise the rupee?
The Reserve Bank of India has introduced several measures aimed at stabilizing the value of the rupee. These steps have successfully lifted the rupee's value against the dollar by approximately 150 paise. A new cash reserve requirement affects large foreign exchange derivatives, increasing hedging costs for companies. The central bank has also restricted speculative trading in rupee currency…
Since Saturday, the Reserve Bank of India (RBI) has implemented multiple measures to assist in strengthening the Indian rupee, with Governor Sanjay Malhotra stating that the currency has reached its appropriate value. These steps have contributed to the rupee's recent increase to 95.28 dollars, a rise of approximately 150 paise over two days.
The primary effect of these actions is a decrease in speculative bets on the currency and a reduction in excessive hedging by businesses anticipating further currency depreciation. However, this has led to increased hedging costs, causing some concern among importers.
The RBI has also removed the dollar requirements of three state-run fuel retailers from the spot rupee market, thereby alleviating pressure on the currency. Moreover, the Foreign Exchange Risk Reserve (FERR) has been introduced, imposing a 20% reserve requirement on large forex derivatives contracts exceeding $2 million. Banks must keep funds equivalent to a percentage of their exposure with the central bank until the contract is fully cancelled.
Consequently, banks will have to pass on this additional cost to their clients, which could increase hedging expenses for importers by at least 150 basis points, potentially discouraging them from hedging their exposure.
The RBI has extended FERR restrictions to non-deliverable contracts involving non-resident customers, thereby limiting companies' dollar exposure to genuine and foreseeable business needs. Additionally, the threshold for foreign exchange derivative transactions has been lowered to $5 million equivalent, curbing speculative trading in the rupee.
Restrictions have also been implemented on rebooking cancelled foreign exchange derivative contracts, and a special dollar window has been established for State-run oil retailers to reduce dollar demand in the spot market. Finally, stricter verification procedures require banks to obtain additional documentation for verifying underlying exposures, further preventing users from hedging contracted exposures with the same underlying exposure.
Economists view these measures as temporary, tactical steps to support the rupee, rather than long-term solutions to its stability.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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