Dollar hedging by Indian companies slumps as RBI cracks down on speculation

Indian companies reduced their dollar purchases used to hedge against a weakening rupee to an eight-month low in October, indicating that the Reserve Bank of India's crackdown on speculative bets is showing results. Forward dollar buying, or commitments to acquire US currency at a later date, declined by 35% from the previous month to $49.5 billion, the lowest since February.

This decline was driven by importers hedging against losses from a weaker rupee. The RBI's measures, including a foreign-exchange risk reserve, have made it more expensive to build forward dollar positions, helping ease pressure on the rupee despite high oil costs straining India's external finances. The currency has risen about 2% against the dollar since the crackdown.

RBI's actions reflect policymakers' concern over persistent foreign-exchange pressures, but these are tactical measures rather than long-term solutions. The curbs have disrupted hedging markets, with activity freezing after the measures took effect. The cost of buying insurance against rupee weakness has risen to multi-year highs, potentially reducing foreign investors' appetite for local assets.

The RBI's interventions have so far contained pressure in the forward market, but underlying demand for dollars remains strong, with monthly dollar purchases by importers climbing around 40% this year.