The RBI partly rolled back FX curbs imposed earlier in the month, which were intended to arrest one-sided depreciation in the rupee, but had caused liquidity and positioning disruptions in onshore as well as offshore trades. According to an official circular on Monday, the central bank will permit transactions in the related-party deals, which include cancellation and rollover of existing contracts, as well as undertake back-to-back hedging in the NDF market to offset the risk from FX contracts. The nominal ceiling on net open positions in the local deliverable market will remain in place, along with restrictions preventing banks from engaging in the full range of FX derivative transactions with related parties. Since these administrative measures were introduced last month, the rupee has strengthened by nearly 2% against the dollar, recovering from record lows of around 95 per USD last month. These relaxations follow Governor Malhotra’s remarks earlier in the month that the curbs were likely temporary. Banks had also reportedly sought some leniency to make room for real hedging requirements of rupee-linked exposures.
Overall, the decision to ease some of the measures appear to be aimed at striking a balance between supporting genuine hedging needs while curbing arbitrage/speculative activity in the currency market. The rupee had also gained marginally in recent sessions on news that the state-run oil marketing companies had been asked to cut dollar purchases in the spot market, and, instead, tap a special credit facility via the largest state-owned bank in the country. This echoes steps taken during the Russia–Ukraine oil crisis and taper tantrum, aimed at streamlining oil-related dollar purchases and limiting further weakness in the currency, although underlying dollar demand–supply imbalance persists. While the direction of global geopolitics and energy market dynamics remain uncertain, the risk of further incremental measures will keep aggressive rupee bears at bay. Onshore forwards are likely to be paid in the near term. Despite recent gains, rupee has underperformed on ytd basis, more than regional peers. Besides the special oil dollar window, other notable options from the 2013 playbook include – gold import curbs, concessions for debt investors, special non-resident deposit facility and as a last resort, policy tightening to improve returns to attract rate sensitive flows, etc.
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