Thursday, December 15, 2011
RBI TAKES ACTION TO CURB RUPEE
The Reserve Bank of India on Thursday sold dollars through public sector banks and announced steps to curb speculation in the foreign exchange market by banks and corporates as it intervened to pull back the rupee from an all-time low of 54.3 against the dollar and help it close at 53.65.
After market hours, RBI also announced a reduction in trading limits for banks. It added that forward contracts by businesses and foreign institutional investors, once cancelled, cannot be rebooked.
As rupee continues to fall, RBI said banks must square up their dollar position by the end of the day. This has been enforced by reducing the net overnight open position limit for banks. On forward contracts, RBI said all such deals booked by both exporters and importers will henceforth be on a fully deliverable basis. If any participant is forced to contract the forward contract, he will not be eligible to receive any exchange gain.
The restrictions in trading limit in forward contracts come in a week in which the rupee has seen its sharpest declines. The currency, which closed last weekend at 52.04, had fallen to 54.3 by noon on Thursday. During the current year, the currency has fallen by more than 18%. Many traders said the rupee would have hit 55 against the dollar if the RBI had not stepped in. The sharp depreciation has made crude imports more expensive and threatens to add to inflation which has only now started showing signs of easing. Forward contracts are deals to sell the dollar at a fixed price in future. Exporters and investors enter into such deals to hedge against the risk of any sharp movement in the currency.
RBI's hand was forced as negative expectations were turning out to be self-fulfilling. The central bank acted only a day ahead of its mid-term policy review on Friday when it is expected to announce its monetary stance for the current quarter. RBI is widely expected to keep key rates unchanged after industrial production dipped 5.1% in October. "These are short-term measures which market participants understand are aimed at stabilizing the market," said Ashish Vaidya, head of fixed income, currency and commodities trading, at UBS. He added that while the rupee was expected to firm up, liquidity in the forex markets would reduce.