RBI measures on forex market not forever, says Governor Malhotra; interventions meant to curb volatility
RBI Governor Sanjay Malhotra said the measures introduced since late March are reactions to specific market movements and do not, in any sense, signal any structural change.
The governor of India’s central bank had some reassuring words for those worried about recent steps taken to curb speculation on the rupee and prop up the local currency: The measures won’t last forever.
“These are reactions to the specific market movements. These are not, in any sense, signaling any structural change,” Reserve Bank of India Governor Sanjay Malhotra told reporters during the post-policy press conference on Wednesday.
Over the long term, the RBI stands committed to the development, broadening and deepening of the markets and the internationalization of the rupee, Malhotra said.
“...we did notice that in the last few weeks of March there was heightened volatility in the foreign exchange markets. We saw that positions were being built up, leading to arbitrage positions between the non-deliverable forward markets and the deliverable markets,” the governor said.
Since late March, the RBI has taken a set of measures to support the rupee. On 27 March, the RBI said the net open positions of banks in the domestic market must be capped at $100 million at the end of each business day by 10 April. The currency appreciated over the past few days after the central bank's 1 April announcement of a second set of measures to curb speculation.
The RBI targeted the rebooking of cancelled forex derivative contracts and tightened norms for related-party transactions. If a company or trader cancels a dollar hedge, they can no longer re-enter the same trade to benefit from price movements, limiting their ability to take directional bets under the guise of hedging.
“In normal times, these linkages are important for an efficient price discovery,” Malhotra said.
He said the RBI’s endeavour has been to widen and broaden the markets. However, when there is excessive volatility and excessive building-up of positions, which only increase volatility and don’t help in price discovery, such kinds of measures are taken.
No target levels
Experts said the RBI’s comments about the rupee also showcased strong confidence-building by the central bank to manage exaggerated moves while maintaining its stance of not targeting particular levels of the rupee.
“The rupee could find some stability over the coming days along with some cooling off in the 10-year bond yield with a 6.8-7% range likely to emerge,” said Sakshi Gupta, principal economist at HDFC Bank.
Others see support for the rupee on the back of a temporary ceasefire between the US and Iran.
“With respect to the rupee, some easing of geopolitical uncertainties following the recent ceasefire should provide some support to the currency. However, the RBI is likely to remain vigilant and continue its efforts to curb excessive volatility in the foreign exchange market,” said Rajani Sinha, chief economist at CareEdge Ratings.
CareEdge Ratings expects the rupee to average at 92-93 levels in FY27 on the assumption that global crude oil prices average $90 per barrel.
In his speech earlier in the day, Malhotra said the RBI’s foreign exchange rate policy remains unchanged in the context of volatility in the rupee since the start of the West Asia war.
Malhotra said that despite stronger macroeconomic fundamentals, the Indian rupee’s depreciation in the previous financial year was more than the average of the previous years. Safe haven flows, he said, have exerted depreciation pressure on the currencies of major economies as the US dollar strengthened.
Policy unchanged
“...let me reiterate (something that) I have said many times. Our exchange rate policy remains unchanged,” said Malhotra. He said intervention in the foreign exchange market is aimed at smoothing excessive and disruptive volatility without targeting any specific level or price band for the exchange rate.
“This is consistent with our longstanding policy of exchange rates being market determined,” he said.
According to Malhotra, the RBI stands committed to this policy and would judiciously continue to contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is warranted by fundamentals.
The Indian rupee traded at 92.45 against the US dollar at 2:34 pm on Wednesday. The local currency hit an all-time low of 95.1250 per dollar on 30 March.