NEW DELHI: The Reserve Bank of India‘s (RBI) latest measures to curb volatility in the rupee could ease near-term depreciation pressure, reduce speculative dollar demand and help withdraw surplus liquidity from the banking system, according to research reports cited by news agency PTI.The measures, announced through circulars on October 10, include tighter restrictions on certain foreign exchange derivative transactions and a new reserve requirement for banks handling rupee-linked currency contracts.They are expected to make some hedging transactions more expensive, potentially reducing demand for dollars in the spot market and easing forward premiums.Kotak Mahindra Bank said the immediate impact on the rupee could be favourable, although it cautioned that the global environment remained uncertain.“The immediate reaction on INR is expected to be very favourable-likely move of USDINR towards sub-95 cannot be ruled out. Forward premia is likely to soften as OMCs and other importer hedging gets contained,” the bank said in its report.IDFC FIRST Bank also expects the measures to lower the USD/INR exchange rate and forward premiums in the near term, while noting that global conditions and balance-of-payments dynamics will shape the currency’s medium-term trajectory.
RBI tightens rules on forex derivatives
Under the October 10 circulars, the RBI barred authorised dealers from allowing users to rebook cancelled rupee-linked foreign exchange derivative contracts. Rollovers at maturity remain permitted, subject to existing regulations.The central bank also lowered the threshold for undertaking foreign exchange derivative transactions without establishing an underlying exposure to $5 million from $100 million. The revised limit applies across authorised dealers and recognised stock exchanges.In another measure, the RBI introduced a Foreign Exchange Risk Reserve (FERR). Authorised dealers must maintain the reserve with the central bank in cash, amounting to 20 per cent of the rupee equivalent of the notional value of each rupee-linked foreign exchange derivative contract exceeding $2 million, where the transaction hedges current account exposure involving the purchase of foreign currency against the rupee.The RBI said the measures were intended to strengthen market discipline, ensure appropriate risk management and maintain an orderly and transparent foreign exchange market.
Higher hedging costs could curb dollar demand
The new reserve requirement could raise the cost of hedging currency exposure for importers, potentially discouraging some transactions and reducing demand for dollars.Kotak Mahindra Bank estimates that hedging costs could rise by 1-1.6 per cent, while IDFC FIRST Bank expects an increase of around 1.5 per cent.However, the relief to the rupee could be limited if external pressures persist. IDFC FIRST Bank identified elevated crude oil prices, foreign portfolio outflows and weak underlying capital flows as factors that could continue to weigh on the currency.The measures could also influence the RBI’s interest-rate decisions. IDFC FIRST Bank said that if the steps ease depreciation pressure by curbing speculative demand and changing hedging behaviour, the central bank could adopt a gradual approach to further rate increases.The bank expects the terminal repo rate to be in the range of 6-6.25 per cent. The RBI raised the repo rate by 25 basis points at its October monetary policy meeting and shifted its stance to calibrated tightening.
Banks expect further withdrawal of liquidity
The RBI’s foreign exchange measures could also contribute to a reduction in surplus liquidity in the banking system.IDFC FIRST Bank estimates that core liquidity surplus could decline to around Rs 2 lakh crore by March 2027 from Rs 10.4 lakh crore on October 2, as currency leakage and balance-of-payments pressures add to the impact of the central bank’s liquidity operations.Kotak Mahindra Bank estimates that the measures could withdraw around Rs 1.5 lakh crore of durable liquidity if they remain in force for another month. The bank also expects further liquidity withdrawal through open market bond sales and foreign exchange intervention.The RBI has announced an open market sale of government securities worth Rs 25,000 crore for October, following earlier liquidity-draining operations.It has also increased the daily maintenance requirement for the Cash Reserve Ratio (CRR) to 99 per cent from 90 per cent following a review of liquidity conditions.
