Ahead of Monday's open, the central bank created a US-dollar facility for state-owned oil refiners to meet their FX needs as the rupee traded near its lows. Breaking new ground, the RBI rolled out an FX risk reserve, obliging banks to park rupee balances with the central bank equal to 20% of the contract's notional size, a rule triggered for any individual derivatives transaction above $2 million. The RBI further clarified that once forward contracts are canceled, they cannot be rebooked, and it cut the cap on FX derivative deals that do not require proof of an underlying exposure to $5 million from $100 million. The approach mirrors a tool the People's Bank of China uses by adjusting reserve requirements on forward contracts.
These steps build on earlier actions to support the currency, including limiting banks' daily net open FX positions to $100 million and, at one point, barring lenders from offering clients non-deliverable rupee contracts, a curb the RBI later reversed. The newest measures are aimed at cooling demand in the foreign-exchange derivatives market.
This weekend's rollout follows a rate increase on Wednesday, alongside an indication that more tightening could be considered. RBI Governor Sanjay Malhotra noted the rupee looks undervalued by certain gauges and cautioned that, in the near term, markets may behave irrationally.
Former RBI executive director G. Mahalingam, who also sat on a 2019 task force reviewing offshore rupee trading, said, "It is not easy to constantly act as a shield when pressure keeps building up." "The steps are some of the strongest we have seen since the taper tantrum. The central bank is building up layers of defenses as the Middle East war shows signs of intensifying and inflows are drying up."
"It is absolutely evident now that 97 per dollar is the RBI's line in the sand for the rupee," said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership Ltd., adding that the message is the drop has been too sharp and the RBI is ready to act to stop a fresh record low.
Defending a currency this hard tells you how serious the pressure has become. Market Briefs covers central bank action free every morning.
Oil prices remain stubbornly high, and overseas investors have withdrawn more than $30 billion from Indian stocks this year. The rupee is down 7% so far this year - the poorest performance in Asia - and on Friday it finished just shy of the all-time low of 96.9650 per dollar.
To reinforce defenses, the RBI has been bolstering its FX resources. A diaspora deposit program brought in a record $133 billion, lifting reserves to almost $800 billion in early September. Since then, the strain of currency support has reduced reserves by $51 billion over the past four weeks. Hedging has become pricier: over the last two months, the one-year cost of insuring dollar exposure has increased by in excess of 100 basis points as the RBI ran sell-and-buy swaps to drain surplus liquidity, while excess cash in the banking system swelled on inflows from forex mobilization programs.
Traders say the latest curbs could help stabilize the rupee, though tighter derivatives rules may make hedging more expensive for companies. "The concern is that regular importers who want to manage their currency risks prudently may now find hedging more difficult and expensive," said Samir Lodha, the founder and managing director of QuantArt Market Solutions Pvt.
Analysts expect a bounce at the open Monday, with many looking for the RBI to protect 97 per dollar. Still, as Dhiraj Nim, a forex strategist with Australia & New Zealand Banking Group in Mumbai, put it, "It buys time but doesn't change the picture: oil prices and capital flows will still decide the rupee's direction." He added, "The coming week's reserves data and rupee moves will show how well this is working."
For your money, this is a central bank leaning harder into currency defense, which can ripple into hedging costs and the outlook for importers and firms that rely on FX forwards. Watch weekly reserves and the rupee's path next week to gauge whether the pressure is easing.
The size of an intervention is the clearest measure of the strain. Get the free Market Briefs daily newsletter and follow it.
