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The rupee jumped 1% to 95.77 against the dollar in early trade on Monday, compared with Friday’s closing level of 96.73 per dollar.
The currency was a standout performer in Asia’s foreign exchange markets, while most regional peers traded in a narrow range. Despite the rally, the rupee is still down 6.6% so far this year.
RBI tightens forex rules to curb dollar demand, raises hedging costs
The Reserve Bank of India on Saturday barred users from rebooking cancelled rupee-linked foreign exchange derivative contracts, slashed the threshold for transactions without establishing underlying exposure and required banks to set aside 20% cash against certain FX contracts, potentially raising the cost of hedging against rupee weakness.
The measures are set to alter corporate hedging strategies by raising costs of banks for FX forward contracts, which are likely to be passed on to clients, while restricting speculative activity in the foreign-exchange market.
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This is expected to temper corporate demand for dollars. In addition to targeting dollar demand from importers, the RBI has opened a special window through which oil marketing companies can buy dollars directly from the central bank, diverting their purchases from the regular market.
The RBI has moved from signalling that the rupee’s weakness may be excessive to directly restraining dollar demand and speculative activity in the FX market, Mitul Kotecha, head of FX & EM macro strategy Asia at Barclays, said in a note.
The measures change where and when dollars are purchased, rather than the underlying demand stemming from oil imports, trade flows and capital outflows, he said, adding that the outlook remains for an orderly depreciation of the rupee.
Dollar Index
The dollar held ground near its strongest level in a year and a half in early Asian trade on Monday as an escalating Middle East conflict kept investors wary ahead of key US inflation data later this week that will influence monetary policy.
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The dollar index, which measures the greenback’s strength against a basket of six currencies, was around 102.14, near the 18-month peak it scaled last week. Trading was confined to a tight range with Japanese markets shut for a holiday, thinning liquidity across the region.
Oil prices swung between gains and losses after Yemen’s Iran-backed Houthis stepped up strikes on Saudi Arabia while two tankers were attacked over the weekend.
Prices were also influenced by Sunday’s announcement from US President Donald Trump about an energy ceasefire between Ukraine and Russia. Brent crude futures were down 1% at $103.55 per barrel in Asian hours.
TOPICSrupeeThis article was first uploaded on October twelve, twenty twenty-six, at five minutes past nine in the morning. © IE Online Media Services (P) Ltd