RBI steps curb rupee bets, pointing to 1% gain

The rupee's decline is tied in large part to energy costs. Elevated crude prices have raised India's import expenses and demand for dollars. The RBI's decision to let oil marketers buy dollars directly via a special channel acknowledges that fuel buying is a key source of strain. This implies the rally is at risk if crude rises anew, including from strikes on Saudi assets over the weekend. Increased hedging expenses should reduce short-term dollar buying and drag forward premiums down, giving some lift to Asian currencies in general. Lasting gains probably require a slowdown in foreign equity outflows, given that administrative moves have in the past provided only fleeting relief.

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While the RBI has raised the cost of betting against the rupee, it has no ability to lower oil prices.

Key points:

• The offshore non-deliverable forward market showed the rupee strengthening, indicating a roughly 1% gain from Friday's settlement near 96.7 per dollar when local trading begins Monday.
• Banks are being directed by the RBI to maintain reserves for substantial hedges and to restrict the practice of cancelling and rebooking rupee derivative contracts.
• According to bankers, the steps could increase hedging expenses by 80 to 150 basis points.
• Companies bought a record $77 billion in forward dollars in September, 80% more than the same month last year.
• Oil marketing firms can now purchase dollars straight from the RBI via a special facility.
• The rupee, which has weakened almost 7% in 2024, neared its all-time trough of below 97 last week.

A sharp rebound is expected for the Indian rupee on Monday following the RBI's intensified measures to check dollar demand. Offshore trading suggests a roughly 1% rise from Friday's settlement near 96.7 per dollar.

The one-month non-deliverable forward contract for dollar/rupee indicated the rupee might climb beyond 96 when local trading starts at 9 am Mumbai time (03:30 GMT, 11:30 pm ET Sunday). These offshore contracts are dollar-settled, enabling trading of the rupee outside India and frequently offering a preview of its opening level.

The RBI's latest actions, meant to curb a wave of corporate hedging against more rupee depreciation, precede the rally. Banks must now hold reserves for big hedges, and the routine cancellation and rebooking of rupee-linked derivatives will be limited. According to half a dozen bankers, the steps could add 80 to 150 basis points to hedging costs, based on how much banks transfer to clients, and aim to discourage speculative bets.

The extent of hedging illustrates the reasoning behind the RBI's move. Corporate forward-dollar buying hit a record $77 billion in September, an 80% increase year-over-year, while selling was much lower at $41 billion, intensifying currency pressure. The restrictions surprised markets, and bankers were busy over the weekend setting up systems for Monday's session.

A separate window has been created by the central bank for oil marketing firms to buy dollars directly, addressing one of the biggest daily drivers of dollar demand. Since India imports the bulk of its crude, the jump in oil prices due to the Middle East conflict has directly increased its import costs.

The rupee has been the weakest currency in Asia this year, falling almost 7%, squeezed by high oil costs and large foreign exits from Indian stocks. Last week it nearly touched its record bottom of below 97, even though about $140 billion had been raised via special dollar deposit programs and higher interest rates.

An advisor on currencies warned that such steps have in the past provided only temporary relief unless the root causes diminish. The sustainability of the rally will probably hinge on oil price trends and foreign investment movements, not on the RBI's most recent restrictions.