RBI's move a stern warning to curb INR speculation: Abhishek Goenka

RBI has drawn a line in the sand on rupee volatility. With NOP caps, arbitrage unwinding, and possible FCNR moves - the central bank is stepping in decisively. But will it be enough>

The Reserve Bank of India’s latest directive on reducing banks; Net Open Position (NOP) in foreign exchange leaves little room for interpretation. Banks are required to comply, and there is no ambiguity around execution. The primary discussion now isn't about if these changes will happen, but rather the timeline -- specifically, how much time the RBI will grant banks to reduce their arbitrage positions between the Non-Deliverable Forward (NDF) and Spot markets.  

What is clearly underway is a structural adjustment in the way currency risk and arbitrage positions have been built across markets. 

This arbitrage, which has historically fluctuated between 30 to 50 paise, is being directly squeezed. As banks are compelled to sell in the Spot market and buy in the NDF market to square up their positions, we are witnessing the natural result: Spot rates are trending down while NDF rates move up. 

 

The RBI's current stance is unmistakably clear: they are determined to curb volatility. 

By capping the Net Open Position (NOP-INR) and setting a stringent end-of-day limit of $100 million, the central bank is taking aim at speculative trades that have previously ballooned into the billions. This measure serves as a stern warning; if speculation persists and the pressure on the rupee does not abate, the regulator has shown it is ready to take even more extreme measures.

  Despite the current hurdles, I remain personally optimistic about the rupee's trajectory. While oil prices have surged and fear remains a dominant market sentiment, the outlook for a year from now appears more stable. In terms of further action, it is anyone's guess what the RBI might do next, but history offers a clue. 

During the 2013 currency crisis, the central bank opened a special FCNR (Foreign Currency Non-Resident) swap window to bolster reserves. 

This possibility was recently echoed by Uday Kotak, who noted in a recent tweet that the time may be approaching for the RBI to consider such "out of the box" measures again. He signaled that if the rupee faces undue stress, a subsidised FCNR window—similar to the 2013 model—could be used to propel significant capital inflows, potentially ranging from $25 billion to $40 billion. 

  While this would hit the RBI's balance sheet due to the subsidy, it remains a potent tool if things truly go out of control.

  Ultimately, the rupee’s fate remains tied to external factors. If geopolitical tensions settle and oil prices cool, we could see the rupee return to the 90 level. Until then, the RBI must continue to monitor the markets closely and enforce these structural curbs.  

While some might call predicting exact levels "gambling" or "speculation" given the current uncertainty, one thing is certain: if the war front stabilizes, there is no fundamental reason for the rupee to remain at 94. Based on the relative exchange rate, a level of 90-91 is far more justified. For now, we watch the levels and wait for the volatility to subside.

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Disclaimer: Abhishek Goenka is founder of IFA Global (a FX & Treasury Management platform) and Billionz (a Wealth and Multi-family office platform). Views expressed are personal.  Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd. 

  

Note: Views as told to Nikita Vashisht