The measures, announced in the wee hours of Saturday, include tightening of foreign exchange derivative norms with reduced transactions limits and stricter documentation, and restricting rebooking of cancelled contracts. Furthermore, a 20% cash reserve requirement has been imposed for large forex derivatives transactions.
Separately, the central bank has also announced a special window to meet the daily dollar requirements of three public sector oil marketing companies – Bharat Petroleum Corporation, Hindustan Petroleum Corporation and Indian Oil Corporation.
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“The measures are intended to strengthen market discipline and ensure appropriate risk management in the foreign exchange market, while maintaining an orderly and transparent market environment,” RBI said.
The rupee closed at 96.73 a dollar Friday, and was threatening to breach the all-time closing low of 96.82. The record daily low against the American currency was at 96.96 seen in May.
The rupee lost about 7% this year, making it one of the worst performing Asian currencies.”The measures announced by the RBI are intended to curb speculative dollar demand particularly from importers. They have done this by introducing a new Foreign Exchange Risk Reserve (FERR) for derivative contracts above $2 million where authorised dealers will have to maintain cash of 20% of rupee equivalent,” said Ashhish Vaidya, head of treasury at DBS Bank.
Under the revised rules, authorised dealers will not be allowed to let users rebook forex derivative contracts involving the rupee, whether deliverable or non-deliverable, if the contracts were cancelled with any bank after the directions were issued. Rollover of contracts on maturity will continue to be permitted, subject to existing regulations.
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The RBI has also sharply reduced the threshold for undertaking foreign exchange derivative transactions to hedge contracted exposures without establishing the existence of the underlying exposure. The limit has been reduced to $5 million equivalent from $100 million across all authorised dealers.
A corresponding reduction has been introduced in exchange-traded currency derivatives involving the rupee, across stock exchanges taken together.
Bankers said the move to impose the 20% FERR levy will make it almost impossible for importers to hedge their exposure and lead to a collapse in forward premiums.
The forward premiums surged across tenures following the central bank’s dollar-rupee sell-buy swaps, which was primarily intended to absorb the excess rupee liquidity from the inter-bank system.
“The 20% levy will make it more expensive to hedge large dollar transactions and could reduce dollar/rupee premiums. This together with taking OMC dollar demand out of the market and reducing the threshold for forex derivative contracts to $5 million will impact dollar demand and support the rupee,” Vaidya said.
Some bankers called the measures restrictive because it will curtail market activity and will lead to abnormal value of the rupee.
“By introducing a 20% FERR, the RBI has made it very difficult for importers to hedge. This additional cash requirement means buying dollars for importers becomes not only very expensive but also heavy on working capital requirements,” said Anshul Chandak, head of treasury at RBL Bank.
This will curb dollar demand and may also lead to fall in forward premiums. Spot rupee will also come down but it remains to be seen how much. Overall these measures will restrict dollar demand for now but how sustainable they are needs to be watched out,” Chandak added
Bankers said taking demand from oil marketing companies out of the market is welcome and an old suggestion that should have been done earlier. But how long the impact of these measures stays before fundamentals catch up remains to be seen.
Immediately on Monday, the spot rupee is likely to appreciate by a percentage point and forward premiums will collapse.
Under this facility, the RBI will sell US dollars to the state-owned oil marketing companies through designated banks. The facility will come into effect from October 12 and will remain in place until further notice, RBI said.