Mumbai, Oct 12 — The Indian rupee on Monday opened higher against the US dollar following fresh measures by the Reserve Bank of India (RBI) to curb speculation and ensure an orderly market.
The rupee appreciated more than a per cent to open at 95.76 against the American currency and also advanced in offshore trading after the central bank took some of its strongest measures to bolster currency since 2013 taper tantrum.
One-month non-deliverable forwards showed rupee strengthening as much as 2.7 per cent to 94.17 per dollar before paring its gain to 0.7 per cent, according to NDTV Profit.
Earlier in October, the central bank announced fresh regulatory curbs, cutting unhedged foreign exchange derivative transaction threshold from $100 million to $5 million and introducing 20 per cent Foreign Exchange Risk Reserve (FERR).
Under new directions, authorised dealers shall not permit users to rebook any foreign exchange derivative contract involving rupee whether deliverable or non-deliverable, which has been cancelled with any authorised dealer after issuance of directions.
However, rollover of contracts on maturity will continue to be permitted.
Moreover, authorised dealers are required to obtain and retain an undertaking from users entering into foreign exchange derivative contracts involving Indian currency to hedge contracted exposures, confirming same underlying has not been hedged with any other authorised dealer.
Central bank also introduced Foreign Exchange Risk Reserve. For all foreign exchange derivative contracts for rupee with notional value exceeding $2 million equivalent undertaken to hedge current account exposures where users purchase foreign currency against rupee, authorised dealers shall maintain with Reserve Bank an FERR in cash equal to 20 per cent of rupee equivalent of notional amount.
RBI added that reserve shall be maintained daily until termination of contract.
Additionally, central bank said any attempt by users to circumvent requirement through multiple transactions will be considered violation. Dealers shall report FERR details daily through Centralised Information Management System.
Directions under Circular 25 come into force with immediate effect, while FERR directions under Circular 26 apply to contracts undertaken after issuance. Measures are intended to strengthen market discipline and ensure appropriate risk management while maintaining orderly and transparent market environment, RBI said.
RBI on Saturday also rolled out series of steps including opening special window to meet dollar needs of state-run oil companies and introducing a reserve requirement for certain foreign-exchange derivatives.
The central bank was spurred into action after rupee approached record low near 97 per dollar. RBI had raised interest rates on Wednesday and signalled it was open to further monetary tightening.
This highlights that RBI has been behind curve on FX defense, given slew of measures that have been necessary this year, Galvin Chia, emerging Asia strategist at Societe Generale in Hong Kong, said NDTV Profit reports.
Rupee is poised to appreciate in spot market when trading resumes Monday, with analysts expecting RBI to defend 97-per-dollar level, it added.