The Indian rupee strengthened by 1.3% to 93.59 against the US dollar following the Reserve Bank of India’s (RBI) imposition of onshore position limits. The RBI directed banks to cap their net open positions in rupees at $100 million to control speculative trading and stabilize the rupee’s decline. Commercial banks acting as authorised dealers must adhere to the daily cap by April 10, with potential adjustments based on market conditions.
Estimates indicate that these positions range from $25 billion to over $50 billion, reflecting the significant impact of the restrictions. The rupee had depreciated by over 4% in March amid geopolitical tensions, dropping to 94.8125 on Friday. Concerns regarding sustained high crude prices have further weighed on the currency and the overall macroeconomic environment.
Analysts highlighted the escalating West Asia conflict, with Brent crude prices surging to around $116 per barrel. This conflict has disrupted India’s previous ‘Goldilocks’ macroeconomic scenario characterized by high growth, low inflation, and stable deficits. The market has factored in these risks, leading to a decline in the Nifty’s trailing price-to-earnings ratio, although certain sectors like financials remain appealingly valued.
The RBI’s decision to limit net open positions is expected to provide near-term support to the rupee. Analysts anticipate that unwinding substantial dollar positions could bolster the rupee in the short run. However, sustained dollar demand and inflation risks driven by energy prices continue to exert pressure on the rupee, with its strength dependent on significant corrections in crude prices.
Brent crude futures surged by 3.66% to $116.70 per barrel, nearing their 52-week high, while US WTI futures reached $103.38, marking a 3.75% increase from the previous session.
