Stories
India FX Rule Changes Threaten Policy Predictability And Market Liquidity Warns Allianz
- •Allianz Global Investors warns that frequent foreign-exchange rule changes in India risk undermining policy predictability and fragmenting currency market liquidity.
- •The Reserve Bank of India has increased hedging costs for importers and restricted companies from rebooking cancelled FX contracts to discourage dollar demand and support the rupee.
- •Ze Yi Ang, senior portfolio manager at Allianz, noted that these regulatory measures could cause legitimate hedging to be delayed, shortened, or shifted offshore.
- •Offshore hedging costs have fallen well below onshore levels, highlighting an unusual divergence and market segmentation.
- •With FX rules heavily tightened, the RBI may resort to further interest rate hikes if rupee pressure persists and inflation remains above target.
Key Questions Answered
The Reserve Bank of India has made hedging more expensive for importers and certain transactions for banks, while barring companies from rebooking cancelled foreign-exchange contracts. These repeated changes risk undermining policy predictability, fragmenting currency market liquidity, and causing legitimate hedging to be delayed, shortened, or shifted offshore.
If currency pressure persists, the RBI may turn to interest rates as its next line of defense. The central bank recently raised its policy rate by 25 basis points and shifted to a calibrated tightening stance, supported by acceleration in retail inflation to 5.54% in September.
Frequent regulatory changes and intervention by the central bank to shore up the rupee have raised hedging costs and created an unusual divergence where offshore hedging costs fell well below onshore levels. This makes foreign investors more cautious regarding hedging efficiency, policy predictability, and how easily they can manage currency risk.
