The Indian rupee appreciated 97 paise to open at 95.76 against the US dollar on Monday (October 12), compared with Friday’s (October 9’s) close of 96.73, after the Reserve Bank of India (RBI) announced measures to curb speculative activity and ease pressure on the regular foreign-exchange market.
The measures, announced on Saturday (October 10), include restrictions on rebooking cancelled rupee-linked forex derivative contracts, a reduction in the threshold for transactions without underlying exposure and a 20% cash requirement against certain foreign-exchange contracts.
The RBI has also opened a special window for three public sector oil marketing companies (OMCs) to buy dollars through designated banks, diverting their purchases from the regular market.
Here is what the measures mean for the rupee, businesses and currency markets.
How could the RBI’s measures affect the rupee?
The OMC facility could reduce their immediate demand for dollars in the regular market. Separately, tighter rules on forex derivatives could discourage speculative positions and make certain hedging transactions more expensive.
However, the measures do not eliminate India’s underlying dollar requirements for oil imports, trade payments and other overseas transactions. The rupee’s subsequent movement will also depend on oil prices, capital flows and global currency trends.
Mitul Kotecha, head of FX and emerging markets macro strategy for Asia at Barclays, said the RBI had shifted from signalling that the rupee’s weakness might be excessive to directly restraining dollar demand and speculative activity. He maintained an outlook for an orderly depreciation of the rupee.
What do the measures mean for importers and exporters?
Importers could face higher costs for certain forward contracts as banks account for the cash requirement and potentially pass on the additional costs. They may reassess their hedging strategies, although their underlying dollar payment obligations remain.
Exporters have not been directly affected by the new measures. However, a stronger rupee reduces the rupee value of their dollar earnings when converted, while a weaker rupee increases it, all else being equal.
Why could forward premiums rise or fall?
Forward premiums reflect the difference between the forward exchange rate and the spot rate, generally expressed in annualised terms. They are influenced by interest-rate differentials, demand for forward contracts and market liquidity.
The RBI’s measures could exert pressure in either direction:
Premiums could fall if higher hedging costs lead importers to reduce demand for forward dollars.
Premiums could rise if higher costs for banks, tighter liquidity or the RBI’s management of its own forward book push up market pricing.
Kotecha said the competing effects made the direction of forward premiums uncertain.
FAQs
Does a stronger rupee make dollar payments cheaper?
Yes, all else being equal. At ₹95.76 per dollar, a $1,000 payment would cost ₹95,760, compared with ₹96,730 at Friday’s closing rate, excluding charges and other costs.
Will the rupee continue to appreciate?
Not necessarily. The opening gain does not guarantee further appreciation. Oil prices, foreign investment flows, trade-related dollar demand and global market conditions will continue to influence the currency.
Do the RBI’s measures eliminate dollar demand?
No. They change how some dollar purchases are made and seek to discourage speculative activity. Demand arising from imports and other overseas payments remains.