The Indian rupee surged 1% at Monday's open after the central bank moved to alleviate pressure on the currency by diverting oil companies' dollar purchases away from the spot market and introduced measures expected to temper corporate demand for forward dollars.
The rupee opened at 95.76 to the dollar, having settled at 96.73 on Friday. The currency was a standout performer in Asia's foreign-exchange markets, with most regional peers trading in a narrow range.
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.
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.
The RBI’s requirement for banks to set aside 20% cash against certain FX hedges taken by importers would make forward hedging more expensive for importers and could push up the premiums they pay.
From the interbank market’s perspective, however, lower demand for forward dollars from importers could pull premiums down. Exporters' hedging activity, meanwhile, is not affected by the RBI's measures.
While weaker importer forward demand points towards lower premiums, the wider balance-sheet costs, reduced liquidity, and RBI management of its own forward book could push pricing in the opposite direction, Kotecha said.
