The jolted currency markets by barring banks from offering the most widely used offshore rupee trading instrument, sending the currency to its biggest gains since 2013.
The move — targeting the $149 billion-a-day non-deliverable forwards market — signals a more forceful push after last week’s step of capping onshore positions at $100 million a day provided only a brief reprieve for the battered currency.
The measures suggest the authority is prepared to escalate its push to curb speculation and support the rupee, a risk Barclays Plc had already flagged. Further steps may follow, potentially even before the central bank’s April 8 rate decision.
Here’s a look at the key measures the authority could consider.
Special oil window
One immediate option is to open a dedicated dollar swap window for oil refiners, who account for $250 million to $300 million in daily demand. By supplying dollars directly from its own balance sheet, the RBI could remove a key source of demand from the market and offer quick support to the rupee. These swaps can be unwound later.
It is a playbook the central bank used during the 2013 taper tantrum, when the RBI supplied about $12 billion to refiners as the rupee slid past 60 per dollar — then a record low.
Such a window “should allow better visibility on genuine foreign exchange demand and supply dynamics,” said Soumya Kanti Ghosh, chief economic adviser at State Bank of India and a member of the prime minister’s economic advisory council.
Stepped-up intervention
The RBI can also ramp up direct market intervention. With foreign exchange reserves of about $700 billion, it has room to sell dollars and buy rupees to curb volatility. To avoid tightening liquidity too much, the central bank can offset the impact through bond purchases.
“There is no reason to suggest that reserves should be used only for rainy days,” Ghosh said, adding there is “still time to intervene in the market to prop up the rupee.”
FIMA backstop
If stress deepens, the RBI has a more technical backstop available. It could tap the US Federal Reserve’s Foreign and International Monetary Authorities repo facility by pledging part of its $190 billion in Treasury holdings.
This would allow the RBI to access dollars through overnight repo operations, which can then be rolled over for seven days, former Deputy Governor Michael Patra wrote in his recent column in Basis Point Insight.
The RBI could then supply dollars domestically via short-term swaps aligned with the FIMA tenor. This approach helps avoid interest rate risk while also reducing counterparty risk, Patra wrote.
NRI deposits
Another route is to raise dollar funds from non-resident Indians by offering attractive rates, a strategy used in the past. In 2013, the RBI garnered $30 billion through such deposits at around 3.5 per cent.
This option looks expensive now. US interest rates are much higher than they were back then, with the Fed’s target rate currently at 3.75 per cent. Add in elevated global yields and hedging costs, and this option is prohibitively costly for the RBI at present.
CRR increase
The central bank could raise the cost of funds for banks temporarily by draining liquidity via a higher cash reserve ratio, according to Gaurav Kapur, chief economist at IndusInd Bank.
The RBI used this tool in 2013 — the year of taper tantrum — when the rupee came under pressure. A hike would also restore the ratio to its previous levels after it was cut by a full percentage point to 3 per cent in June to boost liquidity into the system.
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