India's central bank stepped up its defense of the battered rupee, rolling out a measure to curb speculation after it slid to a new low amid concerns of a widening trade gap driven by the US-Iran war.
The Reserve Bank of India said late Friday that lenders acting as authorized dealers in the rupee must ensure their open positions in the onshore currency market do not exceed $100 million at the end of each trading day. Banks must comply by April 10, the regulator said, adding that such limits may be set depending on market conditions.
The cap is aimed at discouraging “speculative trading in currency markets,” said Anshul Chandak, head of treasury at RBL Bank Ltd. “They might bring in more measures if depreciation continues,” he added, referring to the rupee's weakness.
The step also comes as the RBI's flexibility is shrinking. Its defense of the currency has sharply reduced its foreign-exchange reserves, potentially limiting its ability to intervene aggressively. The country's forex reserves have dropped more than $30 billion in the first three of March, according to the latest data, with analysts partly attributing the decline to the authority's support of the rupee.
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The local currency fell past the closely watched 94 per dollar mark for the first time on Friday, weakening almost 1% against the greenback. That takes its decline to more than 4% since the Iran war broke out a month ago, making it Asia's worst-performing currency so far this year.
“The RBI's move comes at a time of low dollar supply in the market — that is why they are managing position limits to curb excessive swings in the currency,” says Dilip Parmar, currency analyst at HDFC Securities.
Uncertainty over the duration of the conflict has darkened the outlook for Indian assets, with global funds pulling more than $11 billion from stocks this month. Meanwhile, the nation's index-eligible bonds have seen record outflows of $1.6 billion in March.
Brent prices held well above $100 per barrel on Friday, far higher than the $70 baseline assumed by the RBI in October. Bloomberg Economics estimates that Brent crude at $100 a barrel and gas prices 50% above pre-war levels will raise India's import bill by $5 billion a month.
Elevated energy prices risk not only pushing up inflation and widening the current-account gap in the import-dependent economy, but also complicating the central bank's task after it stepped up support for both bonds and the currency in the early stages of the conflict.
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