Stories
RBI Steps Up Currency Defense as Importers Rush to Hedgeing Amid Rupee Slide
- •India's central bank is targeting importers and currency derivatives to curb speculative bets and stem the rupee's relentless decline.
- •Importers accumulated a record amount of currency hedges in September, with forward dollar purchases soaring 44% to an average of $64 billion a month.
- •Governor Sanjay Malhotra noted that forex markets have become unduly pessimistic about India's economy amid the currency sliding toward the 97 mark.
- •New RBI restrictions require lenders to set aside a 20% risk reserve for large forex derivative transactions, raising hedging costs for companies.
- •While the latest measures have steadied the rupee temporarily, analysts warn they may also impact firms with genuine dollar demand and reverse market liberalization.
Key Questions Answered
The RBI introduced a risk reserve requirement where lenders must set aside 20% of the rupee equivalent for forex derivative transactions exceeding $2 million. Additionally, canceled forward contracts can no longer be rebooked, and the limit on derivative transactions without an underlying asset was reduced from $100 million to $5 million.
State-owned oil refiners, which require about $10 billion a month for crude imports, are taken out of the open market. Instead of buying dollars from the interbank market, they can directly access foreign exchange reserves through a special window created by the central bank.
The RBI widened its defense because the rupee slid toward 97 against the dollar despite previous steps like raising policy rates and a diaspora deposit program. Surging forward dollar purchases and heavy speculative activity by importers bracing for further weakness drove the central bank to intervene deeper in the economy.
