MUMBAI: India has moved to curb speculative bets against the rupee, taking one of its most forceful steps in over a decade as the cost of defending the currency rises.
Last Friday, the Reserve Bank of India (RBI) announced new rules capping the open positions banks can hold in the onshore currency market at US$100mil at the end of each trading day.
The change, effective April 10, forces lenders to shrink their books, limiting their ability to run large one-sided bets against the rupee.
The urgency reflects mounting concern about the rupee, which has slid to successive record lows following the Iran war.
That is pushing the RBI to shift away from relying mainly on spot and forward market interventions – tools that have already contributed to a more than US$30bil drawdown in foreign exchange reserves in the first three weeks of March – to more direct measures targeting financial institutions.
“The move signals clear discomfort with rupee weakness and reflects a shift from direct intervention to controlling market positioning, offering near-term stability but limited influence on longer-term fundamentals,” said Kunal Sodhani, head of treasury at Shinhan Bank in Mumbai.
Lenders are seeking to delay the deadline to comply, warning that such a rapid unwind may trigger large losses, and urged that the rule apply only to new bets, sources said.
Outstanding bets involving such positions amount to at least US$30bil, the sources added.
Dollar-rupee offshore points surged early yesterday, reflecting the scramble to square off bets before the start of local currency trading at 9am Mumbai time.
Pressure on the rupee has mounted since the Iran war broke out a month ago.
The currency has fallen more than 4% over that period to 94.82 as of last Friday, and is Asia’s worst performer this year.
Uncertainty over the duration of the conflict has prompted global funds to pull more than US$11bil from Indian equities, while index-eligible bonds have seen record outflows of US$1.6bil in March.
Part of the challenge for policymakers is where that pressure is coming from.
While the rupee trades in Mumbai, price signals are increasingly determined overseas in hubs like Singapore, London and New York, through derivatives that let investors take positions without access to domestic markets.
That makes traditional intervention less effective.
Large positions can build outside India’s regulatory reach and feed back to domestic markets via arbitrage, forcing the RBI to respond by selling US dollars, draining reserves while doing little to curb the underlying build-up.
By capping how much risk banks can carry, authorities are trying to make it harder for those positions to accumulate in the first place, echoing steps taken in 2011, when the RBI tightened banks’ net open position limits.
“This is a period of extreme stress for the rupee because of an unprecedented energy shock,” said R Gurumurthy, a former RBI regional director, who previously oversaw dollar-rupee interventions.
“If you look at past instances where the rupee has faced such rapid depreciation in such a short time, the RBI has always stepped in with exceptional steps.”
The growth in offshore trading has long unsettled the RBI. When London overtook Mumbai as the top centre for rupee trading in 2019, officials warned that offshore rupee trading was being driven by “speculators and arbitrageurs”.
Most of this activity is in non-deliverable forwards – contracts commonly used in emerging markets, especially for currencies that are not freely traded – allowing investors to hedge or bet on future values without physically exchanging the rupee.
The market’s rapid expansion has coincided with a persistent slide in the rupee, even as India remains one of the fastest-growing major economies, expanding at more than 7% annually in recent years.
Capital markets have also grown, drawing about US$16bil from foreign investors into Indian bonds since their inclusion in JPMorgan Chase & Co’s flagship index in June 2024. — Bloomberg
