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The rupee’s 8.2% decline this year kept the RBI from adding to three interest-rate cuts, even as growth slowed to a decade-low. Photo: Mint (Mint)
The rupee’s 8.2% decline this year kept the RBI from adding to three interest-rate cuts, even as growth slowed to a decade-low. Photo: Mint
(Mint)

RBI said to consider more rupee trading curbs for banks

Regulators restricted derivatives trading on 8 July after the rupee sank to an unprecedented 61.2125 per dollar

Mumbai: India’s central bank may impose more curbs on foreign-currency trading by lenders as the rupee’s slide to a record and the highest exchange-rate volatility in a year threaten to spur inflation and boost costs for investors.

The Reserve Bank of India could lower lenders’ net open position limits involving the rupee, said a person with knowledge of the matter, asking not to be identified as the information is confidential. This refers to the amount of foreign-exchange contracts investors can hold without opposing trade covers. Regulators restricted derivatives trading on 8 July after the rupee sank to an unprecedented 61.2125 per dollar.

I can understand why the authorities are concerned about the exchange rate, as 60 is a very important psychological level, and such steps could rein in speculation, said Jonathan Cavenagh, a strategist at Westpac in Singapore. On the other hand, these measures also have the potential to hurt liquidity, and overseas investors could shy away from the rupee if their foreign-exchange transactions get costlier.

The rupee’s 8.2% decline this year kept the RBI from adding to three interest-rate cuts, even as growth slowed to a decade-low. Global funds cut holdings of Indian debt by a record $5.4 billion last month as concern about a potential paring of US stimulus boosted the rupee’s price swings. If implemented, the RBI’s measures could strengthen the currency in the immediate weeks, while deterring foreign investors if retained for a longer period, Westpac’s Cavenagh said.

Open positions

The RBI cut banks’ net open position limits in December 2011, as the rupee plunged almost 16% that year, before partially reversing the move in May 2012 and this March. The daily average foreign-exchange turnover between banks in the spot market fell 10% in 2012 to $6.6 billion before rising to $7.9 billion this year.

One-month implied volatility in the rupee averaged 10.1% in the three months through March 2012 from 11.7% the preceding quarter, according to data compiled by Bloomberg. The gauge, a measure of expected moves in the exchange rate used to price options, touched 13.64% on 9 July 2013, the highest since June 2012.

The rupee has rebounded 2.2% since reaching its all- time low to 59.8750 per dollar as of 1:52 pm in Mumbai, according to prices from local banks compiled by Bloomberg. It dropped 0.4% on Thursday. BLOOMBERG

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