The Reserve Bank of India’s recent rollback of foreign-exchange curbs has led to a nearly 2% strengthening of the Rupee against the Dollar from its record lows of about 95 per USD. This move aims to strike a balance between supporting genuine hedging needs and curbing speculative activity in the currency market, as per a report by DBS Bank. The RBI has partially lifted the FX curbs imposed earlier to address the Rupee’s depreciation, which had caused disruptions in both onshore and offshore trades.
The Central Bank’s decision includes allowing related-party foreign-exchange transactions like cancellation and rollover of existing contracts. It also permits back-to-back hedging in the non-deliverable forward market to mitigate risks from FX contracts. While maintaining the nominal ceiling on net open positions, the RBI has kept some restrictions on banks’ dealings with related parties in various FX derivative transactions.
These relaxations come after the RBI Governor’s earlier statement that the curbs were temporary. Banks had requested some flexibility to accommodate genuine hedging needs related to Rupee-linked exposures. Additionally, the Rupee saw a slight increase following reports that state-run oil marketing companies were advised to reduce spot Dollar purchases and utilize a special credit facility through the largest state-owned bank.
Radhika Rao, Senior Economist & Executive Director at DBS Bank, mentioned that these steps are reminiscent of actions taken during previous crises to streamline oil-related Dollar purchases and prevent further currency weakness. Despite uncertainties in geopolitical events and energy market dynamics, the possibility of additional measures being implemented could deter aggressive Rupee depreciation.
