While the rupee got a 145-paise boost in the last two trading sessions after the Reserve Bank of India announced a host of measures over the weekend to curb speculation and volatility in the forex market, concerns have emerged after the central bank unveiled additional restrictive measures.
Bank treasury officials said that, following the latest RBI measures on risk management and inter-bank dealings announced on Monday, banks may find it difficult to operate their treasury functions effectively.
The rupee appreciated by about 50 paise on Tuesday. One of the main reasons for this is that there are very few buyers in the market. The spot bid/ask spread had widened to around 20 paise at one point in morning trades. By evening, however, the spread had largely normalised to around two to three paise.
“If participants buy dollars, they may need to enter into forward transactions or swaps, which could attract additional margin/reserve requirements, going by the latest measures. This is restricting market activity,” said a senior dealer with a public sector bank.
Fiat to banks
The RBI on Monday directed banks authorised to deal in foreign exchange (authorised dealers or ADs) to maintain a Foreign Exchange Risk Reserve (FERR) for forex derivative contracts involving the Indian rupee undertaken for hedging the currency risk of their own assets and liabilities.
The FERR, equivalent to 20 per cent of the rupee value of the notional amount of each derivative contract, will be applicable to all forex derivative contracts involving rupee where the AD is purchasing foreign currency against the rupee.
The FERR shall be deposited and maintained in cash with the RBI in India on a daily basis and shall be maintained until the termination of the contract.
“As per the latest circular, it appears banks are required to maintain margins on their own positions as well, including positions taken to hedge their assets and liabilities. Banks already have to maintain FERR on forex-related requirements arising from customer transactions. Now, if similar requirements apply to the banks’ own books, it will significantly increase their costs,” said a treasury official with a private sector bank.
On Tuesday, the Indian currency ended at a five-week high, gaining 49 paise to close at 95.28 per US dollar, compared with the previous close of 95.77. This came on the heels of the rupee appreciating on Monday to close about 1 per cent higher against the Friday’s close of 96.73.
Finance Minister Nirmala Sitharaman on Tuesday acknowledged the rupee’s depreciation in recent months, and added that the RBI is taking steps to stabilise the currency and curb excessive volatility.
Dilip Parmar, Senior Research Analyst, HDFC Securities, observed that the Indian rupee continued its upward trajectory for the third consecutive session, closing near a one-month high.
The advance was driven by regulatory measures implemented by RBI to limit volatility and curb speculative trading, along with the unwinding of long positions, general dollar weakness, lower crude oil prices and recovery in the domestic equity market.
“Having recovered nearly 2 per cent over three days from the recent high, the spot USD/INR has support at 95.00. While a sustained move below this threshold opens potential toward 94.50, ongoing external macroeconomic pressures are likely to temper further gains,” Parmar said.
RBI measures
Over the weekend, the RBI announced restrictions on the rebooking of cancelled foreign exchange derivative contracts; reduced the threshold for undertaking foreign exchange derivative transactions without establishing an underlying exposure from $100 million to $5 million; introduced the FERR for banks; and prescribed additional documentation for verification of underlying exposures.
The RBI also opened a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs) – Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation.
Meanwhile, yield of the 10-year Government Security ended a tad lower at 7.37 per cent against previous close of 7.39 per cent. Kunal Sodhani, Head of Treasury, Shinhan Bank said, “RBI has sucked out liquidity with its recent moves. In the next two to three days, 10-year yields are expected to be in the range of 7.2 per cent to 7.4 per cent. This may solve the interim problem. but the RBI intervention will not succeed in the long term if the global indices stay where they are.”
(With inputs from Ashokamithran T)