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RBI defends the rupee

business Updated: Dec 15, 2011 20:48 IST
HT Correspondent
Reserve Bank of India

The Reserve Bank of India on Thursday cracked down to stem an undue slide in the rupee, intervening in the foreign exchange market on the one hand and also curbing speculation as the currency dipped to a new low.

The central bank imposed restrictions on forward contracts — using which companies with genuine foreign exchange transactions hedge against adverse movement but which is also used by traders and institutional investors to take bets for short term gains.

The rupee continued its free fall as it breached the Rs 54 mark to the US $ and lost 61 paise to close at Rs 54.3 on Thursday as local demand amid outflow of funds from India pressured the currency.

The rupee resumed lower at Rs 54.2 per dollar from overnight close of Rs 53.7.

Experts expect the depreciation to continue and see stability at the 56-57 level.

"It has now been decided that henceforth, forward contracts booked by the FIIs (foreign institutional investors), once cancelled, cannot be rebooked,” said the banking regulator in a notification.

Until now, FIIs were allowed to hedge currency risks on the market value of their entire investment in equity or debt in India as on a particular date. However, following Thursday’s rule, the contracts once cancelled can be rebooked only to 10% of the market value of a portfolio as at the beginning of the financial year.

"What the RBI is trying to do here is that while it allowing plain vanilla hedging by companies, it is cutting out any speculative element — once you have hedged at a particular level, you cannot expect to alter that if there are expectations that the rupee might depreciate further," said Samiran Chakraborty, research head, India, StanChart.

Also the RBI, after market hours, reduced the net overnight open position limit or trading limits for banks in the foreign exchange market in another attempt to stop speculative uncertainty from building up.

"It is a rare market development," Naveen Raghuvanshi, associate vice-president for currency trading at Development Credit Bank, was quoted by Reuters as saying.