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RBI Tightens Forex Grip to Shield the Rupee
11 Oct
Summary
- Forex derivative rules tightened with lower limits.
- Stricter documentation and reserve requirements imposed.
- Special dollar window created for oil companies.
The Reserve Bank of India (RBI) recently intensified its control over foreign exchange derivatives, introducing measures to shore up the Indian rupee. These actions, taken on Saturday, involved lowering transaction limits and mandating more rigorous documentation for forex contracts. The rupee, pressured by continuous foreign capital outflows and rising fuel prices, had been nearing an all-time low.
Among the new regulations, the RBI has restricted the rebooking of cancelled forex derivative contracts and imposed a 20% cash reserve requirement on contracts exceeding $2 million. To address daily dollar needs, a dedicated window has been established for three public sector oil marketing companies: BPCL, HPCL, and IndianOil. These steps are intended to foster market discipline and ensure robust risk management.
Furthermore, the threshold for undertaking forex derivative transactions without an underlying exposure has been drastically reduced from $100 million to $5 million. This adjustment also applies to exchange-traded currency derivatives involving the rupee. Bankers anticipate these restrictive measures could make hedging more expensive, potentially affecting forward premiums and curbing market activity, while aiming to support the rupee's stability.
