Rupee rallies to 1-month high on RBI curbs, but banks remain uneasy

The rupee gained 0.6% in October, mainly due to a series of steps by the RBI in the last few days to curb speculative bets

The rupee strengthened 0.5 per cent on Tuesday to a one-month high, outperforming its Asian peers as measures by the Reserve Bank of India (RBI) to curb speculative bets helped support the currency. But the central bank’s latest foreign exchange curbs have unsettled some banks, with uncertainty over implementation prompting a few lenders to hold back from quoting contracts that require them to buy dollars for clients, market participants said.

 

The rupee settled at 95.28 against the dollar, compared with 95.78 in the previous session, taking its gains over the past three trading sessions to 1.6 per cent.

 

The recovery has come as the RBI steps up efforts to ease pressure on the rupee, including by opening a

 

dedicated dollar window for state-run oil marketing companies and tightening rules on foreign exchange derivatives to rein in speculative positions and curb spot-market dollar demand.

 

The uncertainty over the latest requirements has kept trading subdued, with exporters and importers largely limiting activity to essential transactions as banks seek clarity on their implications for hedging operations. 

 

“The Indian rupee continued its upward trajectory for the third consecutive session, closing near a one-month high,” said Dilip Parmar, senior research analyst at HDFC Securities.

 

He attributed the gains to the RBI’s regulatory measures, the unwinding of long positions, broad dollar weakness, lower crude oil prices and a recovery in domestic equities.

 

The central bank added to its curbs in a notification issued late on Monday, restricting non-deliverablederivative contracts (NDDCs) involving the rupee offered to non-residents to hedging purposes only, which prevent non-residents from speculating.

 

“On a review, it has been decided that henceforth, Authorised Dealers shall offer NDDCs involving INR to a non-resident user only for the purpose of hedging,” the RBI notification said.

 

“Overarching objective is to deter speculative activity and ensure that only genuine flows and hedges are undertaken,” Abhishek Goenka, founder and chief executive officer (CEO) at IFA Global, said.   

 

“It also increases the effectiveness of the RBI’s intervention, as we have seen over the past couple of days. Earlier whenever the RBI used to intervene, market used to wait for it to get over and then again position against the rupee,” Goenka added.

 

The notification also requires authorised dealers to maintain a foreign exchange risk reserve (FERR) equivalent to 20 per cent of the notional amount of eligible rupee derivative contracts undertaken to hedge currency risks on their own assets and liabilities.

 

The reserve requirement has raised questions among bankers over how it should be implemented, according to market participants. Some lenders have responded by suspending quotes for client transactions involving dollar purchases, amid uncertainty over the operational requirements.

 

“The RBI issued a circular restricting NDF (non-deliverable forward) only for non-resident user that too only for the purpose of hedging. Also, banks that hedge their own assets and liabilities will also pay 20 per cent FERR for buying dollars,” said Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP.

 

“This caused a panic amongst a few bankers who stopped hedging for clients where they are required to buy dollars,” he said, adding, “There were no further instructions from RBI regarding how FERR is to be operationalised.”

 

The Foreign Exchange Dealers’ Association of India (Fedai), the industry body representing authorised dealers, is seeking clarification from the RBI to ensure that banks apply the new requirements consistently.

 

“We have sought some clarity on how to go about the new requirements because there has to be a uniform practice among all the market participants,” said the treasury head at a state-owned bank.

 

The uncertainty was also reflected in sharp movements in forward premiums during Tuesday’s session. The one-month premium rose to about 7 per cent before easing to 5.66 per cent, while the one-year premium climbed to 4 per cent before retreating to 3.65 per cent in the afternoon, after receiving interest from public sector banks.

 

The rupee found support around 95 to the dollar, according to a market participant. A sustained move below that level could open the way towards 94.50, although external macroeconomic pressures are likely to constrain further gains.

 

The dollar index fell 0.2 per cent to 102.3 on Tuesday, while other Asian currencies were largely range-bound. Lower crude oil prices offered additional support to the rupee, but elevated oil costs and persistent foreign portfolio outflows remain risks to a sustained recovery.