Rupee grabs RBI lifeline, gains most in 19 months

The rupee on Friday gained 94 paise against the dollar, its sharpest rise in 19 months, and ended below 53 to the greenback after the Reserve Bank of India (RBI) announced steps yesterday to curb speculation and reduce volatility in the foreign exchange market.

The central bank had announced the new guidelines on forward contracts in foreign exchange after market hours. The Indian currency had touched an all-time low of 54.31 in intra-day trade yesterday, before closing at 53.64. It opened on Friday 76p higher and gained further to close at 52.70.

“The huge gap in the day’s demand-supply is bridged and expected to stay in either neutral mode or shift into supply-driven mode; thus bringing the rupee exchange market in firm control of RBI,” said Moses Harding, head, economic & market research, IndusInd Bank.

As part of measures to curb speculative trading in the rupee, RBI banned re-booking of cancelled forward contracts, put limits on hedging based on past performance and reduced net overnight open position limits (NOOPLs) of authorised dealer banks.

“Downside pressure on the dollar-rupee is likely to persist in the near future as authorised dealers adjust positions in response to the new NOOPLs and as lower importer buying of dollar eases upside pressure on the dollar-rupee,” Standard Chartered Bank’s economists said in a note.

However, most economists said the rupee may depreciate again over the medium term, due to weak economic and global factors. “We expect these measures to help the rupee in the immediate near term, but the medium to long term direction will be dependent on the fundamental balance of payments dynamics and global strength of the US dollar,” Taimur Baig and Kaushik Das, economists at Deutsche Bank, said.

According to them, if the rupee weakens again, RBI can sell dollars to oil marketing companies directly against oil bonds, as it had done in 2008-09. This will help reduce the demand for the greenback in the market for making payments related to oil imports.

The rupee has depreciated by close to 20 per cent since August. In December alone, the local currency has weakened by nearly 10 per cent.

In the mid-quarter monetary policy review released on Friday, RBI said the rupee depreciated mainly because of a widening trade deficit, adding pressure to the current account and the tendency of exporters to defer repatriating their export earnings. The central bank said it expects the rupee to remain under stress.

Earlier this month, RBI had announced measures to attract dollar inflows, including raising the caps on spreads for external commercial borrowings.