NEW DELHI: India’s central bank has rolled out a series of measures to support the sliding rupee in its strongest action since the country’s currency crisis in 2013.
The steps include opening a special window to meet state-run oil companies’ dollar requirements, and the introduction of a new China central bank-type tool requiring banks to set aside cash with the Reserve Bank of India (RBI) for some foreign exchange transactions.
The RBI’s surprise announcement last Saturday is expected to bolster the rupee, Asia’s worst-performing currency this year, which closed last Friday slightly above its record low of 96.9650 per dollar.
The exchange rate has been under constant pressure even with the central bank raising interest rates and selling dollars to stem the slide, with the authority’s reserves contracting US$51bil in the four weeks to Oct 2.
“The RBI’s measures represent a virtual shutdown of the market,” said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors in Mumbai.
“The dollar demand from hedging and from the oil companies will now exit the market plus there are severe restrictions on export and import activities.
“We should see at least a 1% rally in the rupee on Monday.”
The currency closed 0.6% higher in offshore trading in New York after the steps were announced.
The three government oil companies will be able to use the facility to access dollars from today, the RBI said in a statement.
The RBI will undertake the sales to Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp through designated lenders, it said.
The new foreign exchange risk reserve will require lenders to maintain with the central bank a holding of the rupee equivalent of 20% of the notional amount of each derivative transaction that exceeds US$2mil.
Other new regulatory steps include prohibiting dealers from re-booking canceled foreign-exchange derivatives involving the rupee.
The RBI also reduced the limit for forex derivative transactions without establishing the existence of the underlying asset to US$5mil from US$100mil.
The central bank’s latest steps echo actions it took in 2013 when it introduced a dollar window for oil companies and provided about US$12bil to refiners to help stabilise the currency.
The foreign exchange risk reserve, however, is a new measure.
“Taken together, this is the most comprehensive set of currency-market measures since 2013,” said Anindya Banerjee, head of research, commodity and currency derivatives at Kotak Neo.
Still, economists warn that the country’s balance of payments will have to undergo structural improvement for pressure on the rupee to ease more.
Foreigners have pulled out over US$30bil from local equities this year amid a move toward artificial intelligence-led markets.
“This is a short-term fix, not a structural solution,” said Radhika Piplani, economist at Motilal Oswal Financial Services Ltd.
“High crude prices, capital outflows and underlying dollar demand remain key risks.
“The measures may buy the RBI time, but a sustained rupee recovery will require an improvement in these fundamentals.”
Earlier this year, the RBI limited daily net open positions for banks at US$100mil and banned lenders from offering non-deliverable contracts involving rupee to clients, which it later rolled back.
In June, the authority removed taxes on bond investments by foreigners and unveiled its diaspora deposit programme, which raised US$133bil.
The rupee closed 0.1% higher at 96.7350 to the dollar in Mumbai last Friday, slightly stronger than its lowest-ever level recorded in May. The currency has declined more than 7% this year. — Bloomberg
