Mumbai: The rupee surged more than half a percentage point Tuesday, building on its percentage-point advance a day earlier, as Indian banks got busy calculating the cost of fresh derivative-deal curbs that seek to undergird the local currency, arrest capital outflows, and prevent imported inflation from quickening.
The Indian currency ended at 95.28 per dollar, up 0.52% from Monday's close of 95.78 agains the the greenback.
Late Monday night, the Reserve Bank of India (RBI) said banks using derivative contracts to hedge currency risks on their own balance sheets will also need to keep a foreign exchange risk reserve (FERR) up to 20% of the notional amount against each derivative contract, making it prohibitively expensive to hedge their dollar purchases.
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The latest directive follows other measures, aimed at deterring speculative trading, announced over the weekend.
Monday's directive got banks busy with fresh cost calculations on their respective balance sheet commitments, including an assessment of how much they will now have to keep aside for unhedged foreign currency deposits and ongoing external commercial borrowings amid a clear regulatory signal against over-hedging.
"Banks have garnered $133 billion via FCNR(B) deposits, and assuming a 6.5% interest for five years, the coupon outgo could be $40 billion, which is not covered by the RBI facility," said a foreign exchange dealer. "Not all of this interest payment would have been hedged by banks so far, which means that for all the remaining exposure, banks will have to maintain the high FERR."
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Over the weekend, the central bank had announced a raft of other measures that included restricting the rebooking of cancelled contracts and imposed a 20% cash reserve requirement on forex derivative contracts above $2 million.
Anshul Chandak, head of treasury, RBL Bank, said regulatory measures to remove all speculative dollar purchases should stabilise the rupee and prevent a sharp depreciation in the currency.
