RBI steps in to check rupee slide

The Reserve Bank of India (RBI) today swung into action to check slide in rupee value against dollar and speculations by imposing restrictions with immediate effect on forward trading in the local currency by foreign institutional investors (FIIs) and traders, and capped banks exposure to the forex market.

The RBI has decided to withdraw the facility of re-booking forex contracts by companies and FIIs and reduced across-the-board exposure limits of banks which are authorised to deal in the foreign currency.

The central bank said these steps have been taken in view of the "developments in the foreign exchange market". The rupee today slipped to sub-54 level for the first time in its history and touched a low of 54.30 against the dollar. In the last nearly four and half months, the rupee has declined by about 20% against the dollar.

The forward contracts booked by resident, irrespective of the type and tenor of the underlying exposure, "once canceled cannot be re-booked", the RBI said in a notification.

It has also reduced the limit for hedging of foreign currency risks for importers/exporters from 75% to 25% of the average actual import/export turnover in the past three years.

It further said all the forward contracts booked by exporters and importers would be on "fully deliverable basis. In case of cancellations, exchange gain, if any, should be passed on to the customer".

Besides, authorised dealers have been asked by the RBI to ensure that all transactions on behalf of their clients would be on actual remittances and delivery basis and could not be canceled and settled in cash.

FIIs have been barred from re-booking of canceled forward contracts. However, they can roll over such contracts on or before maturity.

The central bank also said the board of directors of authorised dealer banks would reduce overnight exposure limit for treasury operations.

"Net Overnight Open Position Limit (NOOPL) of authorised dealers would be reduced across the board. Revised limits of individual banks are being advised to the authorised dealers separately," it said.

According to the circular, authorised dealer banks would not be allowed to exceed the NOOPL limit during the intra day trade.

Describing the RBI's decision as a "very proactive step", NS Venkatesh, Treasury Head of the IDBI Bank, said, "It will cool the forex market and help in curbing speculation and reducing volatility. Normal demand [of dollar] will only be met."

On the outlook of rupee, he said, "I expect the rupee to open tomorrow at Rs 53 level from the close of Rs 53.64 and hover around Rs 52.50-53 per dollar."