Rupee gains about 1% against the dollar after RBI curbs on dollar demand

The Indian rupee rose about 1% against the US dollar on Monday, October 12, after the Reserve Bank of India (RBI) announced a set of measures aimed at reducing dollar demand in the spot market and curbing speculative positions.

The move in the rupee

The rupee opened at 95.61 per dollar in the interbank market and traded at 95.80 in early deals, a gain of 91 paise on its previous close, The Hindu reported in a PTI-based report. It said the rupee had rebounded from a record low. The previous Thursday the rupee fell 13 paise to 96.88, its lowest closing level, and it ended Friday 17 paise higher at 96.71, the same report says.

The Free Press Journal reported that the rupee closed at 95.77 on Monday, up 96 paise from a Friday close it put at 96.73, and described it as the biggest one-day gain in six months. The two outlets differ slightly on the Friday close (96.71 and 96.73), and so on the size of the gain. The Economic Times reported the rupee at 95.76 at the open, a rise of 1%. The dollar index, which measures the dollar against six currencies, was down 0.08% at 101.94 during early trade, according to The Hindu.

What the RBI announced

The RBI announced the measures on Saturday, October 10, through circulars. According to The Hindu and The Free Press Journal, they are:

• A dedicated dollar window for oil marketing companies, through designated banks. The Free Press Journal says it applies from October 12 to Indian Oil, Bharat Petroleum and Hindustan Petroleum, so their daily dollar needs are met outside the open market.
• A bar on authorized dealers allowing customers to rebook cancelled rupee-linked foreign exchange derivative contracts. Rollovers on maturity remain allowed under existing rules.
• A cut in the threshold for derivative transactions without an underlying exposure to $5 million from $100 million.
• A Foreign Exchange Risk Reserve: banks must hold with the RBI, in cash, 20% of the rupee equivalent of the notional amount of each rupee-linked derivative contract above $2 million that is used to hedge current account exposures involving the purchase of foreign currency.

The RBI said the measures are meant to strengthen market discipline and risk management while keeping the forex market orderly and transparent.

Analysts' assessments

Forex analysts quoted by The Hindu said the measures are expected to help the currency withstand pressure from elevated crude oil prices and a strong dollar. The Free Press Journal says the oil companies' underlying dollar requirements are unchanged, and that the 20% reserve is not a tax on dollar purchases. It adds that legitimate importers could face higher hedging costs.

The Economic Times quoted Barclays as saying that reduced importer demand could lower forward premiums, while higher balance-sheet costs and tighter liquidity might push pricing higher. The Economic Times also reports that analysts remain cautious about whether the recovery will last. The Free Press Journal notes that Reuters reported possible dollar sales by state-run banks, which it describes as market assessments and not confirmed RBI intervention.