RBI imposes stringent norms to check rupee depreciation
Vidrum / 16 Dec 2011
On Dec 15, 2011, the RBI took material steps to stem the fall of the rupee. The central bank sold US dollars through the banks, and has asked to stop speculative trade in the rupee.
On Dec 15, 2011, the RBI took material steps to stem the fall of the rupee. The central bank sold US dollars through the banks, and has asked to stop speculative trade in the rupee. The rupee has declined by 21.25% on a YTD basis. The RBI's move came in after the rupee hit a lifetime low of 54.30. The news came in after market hours yesterday, and the impact was clearly seen today, with the rupee appreciating by 84 bps to 52.80.
Earlier, the RBI had also taken steps like raising the cost ceiling on ECBs, increasing interest rates for foreign currency deposits, etc . to help the rupee appreciate. But the impact of these measures would have been more in the medium-to-long term, and hence the measures did not help the rupee in the current environment. Yesterday’s move, on the other hand, was very strong, and the effect is clearly visible in the exchange rate.
The central bank sold US dollars through the public sector banks, which led the rupee to appreciate. However the amount of the sales was unknown. The RBI has also asked the banks to square off their open position by the end of the trading day. This will reduce the overnight positions, which were kept open by the bank on a speculative basis to gain from the currency movements. The net overnight open position limit for the dealers would also be reduced.
Till now, FIIs and companies were free to cancel and re-book as they wished, which resulted in unnecessary speculation. Now, forward contracts booked by FIIs and companies, once cancelled, cannot be re-booked. Also, the hedging limit for the companies has been reduced for exports and imports. The average limit on import and export turnover has been reduced to 25% from the previous 75% over the past 3 years. All forward contracts would be on a delivery basis, and not just for trading purposes. However, the contracts can be rolled over once they expire. This move will restrict the companies from playing aggressively in the currency market.
This move was much awaited, as investors and market-watchers expected the RBI to intervene in the currency movement. With speculation done away with, the markets would have demand-supply trade, which is definitely healthier. It also would ease some pressure on companies that are net importers, as they are bearing high costs for their imports. The cost of import of crude keeps rising as the rupee depreciates, which ends up widening our deficits and also adds inflationary pressure (petrol, diesel). Further, the move will also help in maintaining our deficit targets to some extent.
We, at DSIJ, firmly believe that the RBI has taken the rights steps against the rupee, which was on a depreciating trend. The move is sure to benefit the Indian economy.
Earlier, the RBI had also taken steps like raising the cost ceiling on ECBs, increasing interest rates for foreign currency deposits, etc . to help the rupee appreciate. But the impact of these measures would have been more in the medium-to-long term, and hence the measures did not help the rupee in the current environment. Yesterday’s move, on the other hand, was very strong, and the effect is clearly visible in the exchange rate.
The central bank sold US dollars through the public sector banks, which led the rupee to appreciate. However the amount of the sales was unknown. The RBI has also asked the banks to square off their open position by the end of the trading day. This will reduce the overnight positions, which were kept open by the bank on a speculative basis to gain from the currency movements. The net overnight open position limit for the dealers would also be reduced.
Till now, FIIs and companies were free to cancel and re-book as they wished, which resulted in unnecessary speculation. Now, forward contracts booked by FIIs and companies, once cancelled, cannot be re-booked. Also, the hedging limit for the companies has been reduced for exports and imports. The average limit on import and export turnover has been reduced to 25% from the previous 75% over the past 3 years. All forward contracts would be on a delivery basis, and not just for trading purposes. However, the contracts can be rolled over once they expire. This move will restrict the companies from playing aggressively in the currency market.
This move was much awaited, as investors and market-watchers expected the RBI to intervene in the currency movement. With speculation done away with, the markets would have demand-supply trade, which is definitely healthier. It also would ease some pressure on companies that are net importers, as they are bearing high costs for their imports. The cost of import of crude keeps rising as the rupee depreciates, which ends up widening our deficits and also adds inflationary pressure (petrol, diesel). Further, the move will also help in maintaining our deficit targets to some extent.
We, at DSIJ, firmly believe that the RBI has taken the rights steps against the rupee, which was on a depreciating trend. The move is sure to benefit the Indian economy.
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