RBI's boldest currency move in years brings rupee only brief relief

By Bhaskar Dutta and Ashutosh Joshi

 

India’s most dramatic step in more than a decade to curb speculation in the foreign-exchange market delivered fleeting gains, with an initial jump in the rupee rapidly fading, reflecting the deep challenges the central bank faces in supporting Asia’s worst-performing currency. 

After surging as much as 1.4 per cent at the Monday open, the rupee quickly pared gains to just 0.3 per cent. The Reserve Bank of India on Friday said it will cap the open positions lenders can hold in the onshore currency market at $100 million per day, forcing them to shrink their books.

 

 

The intervention underscores the RBI’s shrinking flexibility, as foreign-exchange reserves have shrunk in the first three weeks of March amid efforts to defend the rupee following the Iran conflict. The measure immediately drew pushback, with banks warning that unwinding positions totaling at least $30 billion could lead to steep losses. They have requested the rule apply only to new bets, people familiar with the matter said earlier.  

 

“Banks are running massive arbitrage positions, wherein they are short in the offshore market and long dollar onshore,” said Abhishek Goenka, founder of IFA Global. Since the RBI’s limit applies only to onshore positions, banks are forced to trim those wagers, which require them to sell dollars locally, he said.

 

Still, Monday’s move is unlikely to alter the broader outlook, given the still-elevated oil prices. India has been among the hardest hit by the Iran war and rising commodity costs, given its heavy reliance on energy imports. On Friday, the rupee weakened past the closely watched 94-per-dollar mark to a fresh low. 

 

The rupee has already given back much of Monday’s gain due to demand for the greenback from oil importers at lower levels, according to Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors. 

 

Brent prices are holding well above $110 per barrel, far higher than the $70 baseline assumed by the RBI in October. Bloomberg Economics estimates that crude at $100 a barrel and gas prices 50 per cent above pre-war levels will raise India’s import bill by $5 billion a month.

 

The RBI’s move may help the rupee in the near term “but history shows such actions have limited impact,” Systematix Institutional Equities analyst Siddharth Rajpurohit said in a note. “Pressure will likely continue if crude prices remain around $100,” and warned that the brokerage’s target of 100 to a dollar “may occur sooner than later.” 

Bank Stocks Hit

Lenders’ shares fell in early trading, with State Bank of India and HDFC Bank Ltd. sliding more than 2 per cent each. A gauge of bank stocks dropped by a similar extent, extending this month’s 15 per cent slide.  

 

Every ₹1 move in the local currency versus the dollar could lead to a one-time loss of ₹3,000 crore-₹4,000 crore for banks, according to Jefferies analysts.

 

Prior to the RBI’s latest measure, banks were permitted to set the so-called open position limits within 25 per cent of their capital.

 

The rupee has fallen almost 4 per cent since the Iran war broke out and is Asia’s worst performer this year. Uncertainty over the duration of the conflict has prompted global funds to pull about $12 billion from local shares, while index-eligible bonds have seen record outflows of $1.6 billion in March.