The Reserve Bank of India's latest foreign exchange curbs could offer near-term relief to the rupee while tightening liquidity in the banking system, as higher hedging costs and restrictions on currency derivatives seek to curb speculative dollar demand.
Kotak Mahindra Bank said the measures could push the USD/INR exchange rate below 95, while easing forward premiums as oil marketing companies and other importers reduce hedging activity.
IDFC First Bank also expects a near-term decline in USD/INR and lower forward premiums, though it cautioned that external factors will determine the currency's medium-term direction.
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In circulars issued on October 10, the RBI barred authorised dealers from permitting users to rebook cancelled rupee-linked foreign exchange derivative contracts. It also cut the threshold for derivative transactions without underlying exposure to $5 million from $100 million.
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The central bank introduced a Foreign Exchange Risk Reserve (FERR), requiring authorised dealers to maintain a cash reserve equivalent to 20% of the rupee value of eligible derivative contracts exceeding $2 million. The requirement applies to specified hedges against current account exposures involving foreign currency purchases.
These provisions could make hedging more expensive. Kotak estimates costs may rise by 1-1.6%, while IDFC First Bank sees an increase of around 1.5%, potentially discouraging some importers from buying dollars in the market.
However, sustained pressure from elevated crude oil prices, foreign portfolio investor outflows and weak capital flows could limit the rupee's recovery, IDFC First Bank said.
The measures may also influence monetary policy. IDFC First Bank expects the terminal repo rate to reach 6-6.25%, but said reduced currency pressure could allow the RBI to approach further rate increases gradually.
The central bank raised the repo rate by 25 basis points in October and shifted to calibrated tightening.
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Liquidity could tighten further. Kotak estimates the latest measures may withdraw around Rs 1.5 lakh crore in durable liquidity if sustained for another month.
IDFC First Bank projects core liquidity surplus could fall to Rs 2 lakh crore by March 2027 from Rs 10.4 lakh crore on October 2.
(With PTI Inputs)
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