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With the rupee closing on the 97-mark against the dollar, the Reserve Bank of India (RBI) on Saturday unveiled a series of measures to defend the currency. These include a special dollar window for state-owned oil marketing companies (OMCs), tighter restrictions on foreign exchange derivatives and additional reserve requirements for banks.
The most significant measure is the special dollar window for three public sector oil companies—Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation.
Effective October 12, the RBI will meet their entire daily dollar requirements through designated banks. The facility will remain operational until further notice.
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The move is expected to ease pressure on the spot foreign exchange market by taking a substantial source of dollar demand out of regular trading. Oil companies are among the largest buyers of dollars, particularly when crude prices are elevated.
However, the relief may come at a cost. By supplying dollars directly, the RBI will effectively shift part of the pressure from the currency market to its foreign exchange reserves.
The move also follows RBI Governor Sanjay Malhotra’s comments on Wednesday that the rupee may be undervalued, according to several estimates. Speaking at the post-policy press conference, Malhotra said the central bank would ensure that the currency stabilises and support its return to an appropriate valuation.
“The daily oil-importer demand is around $500 million. However, since the RBI will meet this demand, the impact will be reflected in foreign exchange reserves, which may decline slightly,” said Dilip Parmer, research analyst at HDFC Securities.
The intervention comes amid mounting pressure on the rupee from crude oil prices above $100 a barrel, elevated US bond yields and persistent foreign capital outflows. The currency closed at 96.73 against the dollar on Friday, close to its record low of 96.82 touched in May. It has depreciated over 7% so far this calendar year.
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The RBI’s foreign exchange reserves declined by $12.95 billion to $734.60 billion in the week ended October 2, according to the latest central bank data.
The RBI also announced measures to curb speculative activity in the foreign exchange derivatives market.
It sharply reduced the permissible limit for foreign exchange derivative transactions without underlying exposure to $5 million from $100 million. The revised ceiling will also apply to positions in exchange-traded currency derivatives involving the rupee. This means a 95% reduction in the threshold. Market participants can no longer rely on the earlier higher limit to undertake qualifying derivative transactions without establishing underlying exposure. The new threshold is intended to reduce the scope for large positions that are not adequately linked to genuine foreign exchange risks. However, this should not be interpreted as a blanket ban on all currency derivatives above $5 million.
The central bank also barred banks from rebooking cancelled foreign exchange derivative contracts involving the rupee, whether deliverable or non-deliverable, with any authorised dealer after the issuance of the directions. The restriction is aimed at preventing double hedging, although rollover of existing contracts will continue to be permitted. The RBI has also clarified that rolling over contracts at maturity will continue to be permitted, subject to existing regulatory requirements.
In another significant move, banks will have to maintain a foreign exchange risk reserve (FERR) with the RBI equivalent to 20% of the rupee value of the notional amount for each qualifying transaction exceeding $2 million.
The requirement applies to rupee-linked foreign exchange derivative contracts used to hedge current account exposures where customers purchase foreign currency against the rupee. Banks will need to set aside cash for the prescribed reserve rather than freely deploy that money elsewhere.
This could increase hedging costs for banks, influence pricing and encourage banks and customers to reassess how they structure their hedging transactions. The reserve is not automatically a 20% fee charged to the customer. It is a cash reserve requirement imposed on authorised dealers for the specified contracts.
The RBI said the measures were intended to strengthen market discipline, ensure appropriate risk management and maintain an orderly and transparent foreign exchange market.
Treasury officials believe the measures could provide immediate support to the currency, although volatility is unlikely to disappear. A treasury head at a private sector bank said the steps, though conservative, were necessary as the rupee was again approaching 97 against the dollar.
He expects the currency to open around 96.50 on Monday. The market could remain volatile as participants adjust to the new restrictions, while forward premiums may ease.
Parmer also expects the measures to support the rupee when trading resumes on Monday. “However, market sentiment will remain a key driver. The RBI appears to be trying to prevent the rupee from breaching 97 to the dollar. I expect the rupee to strengthen to 96.50 against the dollar,” he said.
While the measures could provide near-term relief, market participants said the underlying pressures remain. Elevated crude prices, rising US yields and continued foreign capital outflows could keep the rupee under pressure.
TOPICSrupeeRupee vs us dollarThis article was first uploaded on October ten, twenty twenty-six, at forty-five minutes past ten in the night. © The Indian Express (P) Ltd