Traders welcome move, calling it positive for rupee given added flexibility provided, especially to exporters
The Reserve Bank of India (RBI) said on Tuesday it will allow companies to keep all of their foreign exchange earnings while also easing restrictions on forwards contracts, reversing two regulations passed during periods of intense rupee volatility.
The moves come after the rupee has recovered after hitting a record low against the dollar in late June, and help address complaints from some companies that RBI regulations were restricting their foreign exchange risk management.
Traders said the move was ultimately positive for the rupee given the added flexibility provided, especially to exporters, though in the short-term it could reduce dollar supply in the market.
"This move can bring some liquidity to the market and is good for exporters," said Hari Chandramgathan, a forex dealer with state-run Federal Bank.
The RBI will reverse its May directive mandating exporters to convert 50 percent of their foreign exchange holdings in their accounts into rupees, which had been intended to stem falls in the local currency during that period.
The exporters and other companies affected by that directive will now be allowed to retain all of their foreign currencies in their Exchange Earners Foreign Currency (EEFC) accounts.
The central bank also said on Tuesday it will allow exporters to cancel and rebook forward contracts comprising up to 25 percent of their total hedged exposure.
The rules further ease a set of directives in December when the RBI banned foreign institutional investors and domestic companies from re-booking forward contracts after cancelling them.
Although the move had been intended to reduce volatility in FX markets during another bout of instability for the rupee, the regulations restricted exporters' ability to manage risk, making it difficult to adjust their forward contracts.
The central bank had already partially rolled back its regulations earlier this month by allowing exporters to cancel and rebook contracts with tenors of over one year.
In a final directive issued on Tuesday, the central bank also tweaked rules in December that had forced banks to reduce their foreign exposure via their net overnight open positions.
The directive sought to reduce the intra-day open positions that banks could hold, but the RBI said on Tuesday rupee exposure held by lenders' overseas branches would not be included in calculating their net overnight open position limits.
The partially convertible unit was trading at 55.63/64 per dollar, weaker compared to its previous close of 55.5850/5950.
The local currency has recovered steadily since hitting an all-time low of 57.32 in late June.
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