The Reserve Bank of India (RBI) stepped in yet again to curb volatility arising out of the arbitrage opportunity in the currency futures market even as the rupee fell to a new low on Monday. The Indian currency closed at an all-time low of 55.03 a dollar, as importers rushed to cover unhedged positions and oil marketing companies continued to buy dollars from the spot market. The rupee touched 55.05 in the day, a record intra-day low.
According to new RBI norms, the net overnight open position limits of banks will not include positions undertaken in the currency futures or options segments. The position limit for banks for trading in futures and options has been set at 15 per cent of the outstanding open interest (that comes to around $450 million, according to the open position on Friday) or $100 million, whichever is lower.
Also, counter-positions cannot be taken between exchanges and the Over The Counter (OTC) market. “The positions in the exchanges, both futures and options, cannot be netted/offset by undertaking positions in the OTC market and vice versa. The positions initiated in the exchanges shall be liquidated or closed in the exchanges only,” the RBI said in a statement on Monday. The central bank has given time till June 30 to wind down the positions.
The central bank’s move after market hours followed the rupee falling for the fourth consecutive day. It had closed at 54.42 on Friday. Public sector entities other than banks also bought dollars, dealers said. “People are building short positions these days. As a result, stop-losses get triggered with every new low the rupee breaches,” said a forex dealer with a domestic consultancy firm.
RBI Deputy Governor Subir Gokarn on Monday said the rupee was under pressure and capital flows were going to be the main determinant of how the currency behaved.
“One is the current account deficit; demand from oil has been strong, particularly today, and the capital flows are not matching that,” said Gokarn. He added the central bank would continue to take steps as necessary.
According to the Bombay Stock Exchange, there were foreign fund outflows of Rs 79 crore from the Indian equity markets that ended flat on Monday.
A weaker euro, despite an assurance from G8 leaders that Greece would continue to be part of the 17-nation currency, added to the rupee’s woes. “We are running out of time and the European politicians, leaders and finance ministers still think they can meet when they’ve got scheduled meetings and work out what to do. The markets are in greater hurry; they want to see some action,” Rob Carnell, managing director, chief international economist, ING, told Business Standard. He expects the rupee to stay under pressure due to headwinds from the euro zone for the next 12-18 months. “I don’t think the Indian central bank can display too much shock to see the rupee getting weaker,” said Carnell.
The rupee has depreciated 4.3 per cent against the greenback since the start of this month. Economists say the global risk-off mode, coupled with underlying weak fundamentals like a high current account deficit, is to be blamed.
However, with the fall in both gold and crude oil prices, there is hope of some respite. “Since the start of this financial year, the price of Brent crude is down 14.5 per cent and gold is down five per cent. A continuation of these trends would bode well for the current account deficit,” Rohini Malkani, economist at Citi India, said in a report.