(April 21): The rupee ended lower after the central bank rolled back some restrictions it had imposed on currency market transactions, including allowing banks to offer offshore derivatives linked to the currency.
The unit was down 0.4% to 93.4975 per dollar, the biggest drop in a week. The gap between three-month forward points in the offshore and the local markets has shrunk to 16 points from about 30 points prior to the Reserve Bank of India’s statement.
The RBI said post-market hours on Monday it will withdraw measures issued on April 1 that bar lenders from offering rupee-linked non-deliverable forwards to clients, the most widely used tool for offshore trading. It also granted banks some flexibility in related-party trades, including the cancellation and rollover of existing contracts typically used by corporates. However, the US$100 million cap on banks’ open positions imposed on March 27 remains in place.
“The RBI has allowed the cancellation and rebooking of forwards by corporates, which creates some opportunity for them to speculate and arbitrage, although it’s not easy,” said Anindya Banerjee, currency strategist at Kotak Securities Ltd.
The RBI’s restrictions — which had effectively shut out a US$149 billion-a-day offshore market — were introduced to curb speculative arbitrage bets that had pushed the rupee to record lows. The trades typically involved buying dollars onshore and selling them offshore, adding strain to the local currency.
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Governor Sanjay Malhotra had signalled on April 8 that the measures would not remain "forever", signalling a temporary approach. Still, overseas investors had warned the curbs could dent the appeal of local assets by driving up hedging costs.
Citigroup Inc analysts including Johanna Chua said in a note that, in their meetings, market participants had voiced concerns about the RBI’s “drastic steps” to squeeze foreign-exchange market liquidity. Outflows from India’s debt market accelerated after the move, with withdrawals this month set to be the biggest since June.
Still, the curbs had helped stabilise the rupee after it slid past 95 per dollar to a record low in late March amid the oil shock triggered by the Iran war. Since the initial measures were announced on March 27, the currency has recovered nearly 1.5%.
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The recovery has also been helped by reports of oil refiners securing dollars via a special window, which reduced the strain on the spot market.
The easing is aimed at “restoring normal hedging activity, without reopening the door to excessive speculation", said Kunal Sodhani, head of treasury at Shinhan Bank India.
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