Rupee volatility may keep RBI from lifting forex curbs

Despite various transactional restrictions still in place, there are fears of volatility returning to the rupee-dollar exchange rate.

Traders said there would be high dollar demand from Indian companies for redemption of foreign bonds, payment for oil imports and in case of risk aversion if euro zone crisis intensifies. Hence, expectations that the Reserve Bank of India (RBI) might roll back the temporary blocks were dim.

“The market was quiet in the forwards segment, because trading was reduced to being need-based rather than speculative. Trading positions of banks were down due to limits on overnight open positions,” said a dealer from a foreign exchange consulting firm.

It would be in the interest of market participants if the restrictions were removed but the rupee may suffer, the dealer added.

In December, the central bank had disallowed cancelling and rebooking of forward contracts. It also revised limits on net overnight open positions of banks to cut artificial dollar demand from the foreign exchange market. The steps were taken after the rupee touched an all-time low of 53.75, against the dollar on December 15, 2011.

Ratings agency Icra said in its report, prices of crude oil might rise on escalating geo-political tensions and liquidity measures taken by various central banks to prop domestic growth might boost international commodity prices and in turn widen India's current account deficit. "This may prompt a depreciation of the rupee," said the report.

Recently, RBI Deputy Governor H R Khan said the central bank might look at withdrawing limits placed on the intraday foreign exchange positions in a calibrated manner. However, with volatility risks in place, RBI might not lift the curbs in the near term. The central bank is scheduled to announce the annual monetary and credit policy for the current financial year on Tuesday.

RBI had also made it mandatory for banks to report high value foreign currency transactions on a temporary basis. "Instead, RBI might introduce stricter regulations to prevent any discrepancies in the foreign exchange market," said a dealer with a private bank.

The rupee had depreciated by 14 per cent against the dollar in financial year 2011-12. While support is expected from foreign fund inflows, there are huge FCCB redemptions lined up in this financial year.

According to RBI data, FCCB redemptions are to the tune of $3.7 billion in the current financial year, higher than $3.4 billion in 2011-12.

The rupee, therefore, is expected to weaken further despite the restrictions in place.

“The absence of capital inflows and sustained dollar demand from companies and oil refiners have led to a gradual weakening in the rupee exchange rate and a test of 52 per dollar was very much on the cards,” said Param Sarma, director and CEO, NSP Treasury Risk Management Services.