The Indian rupee turned over a new leaf after hovering around its record low just a week ago. The currency had weakened to 96.8 levels against the US greenback, hinting at another fresh all-time low after its September free fall.
During these seven days, the rupee has sharply recovered by 2 percentage points or 2 units and settled at 95.06/dollar levels on Thursday. What prompted this swift comeback?
RBI To The Rupee Rescue: FERR To OMC Regulations
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.
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.
Further, it announced a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs).
The central bank also announced regulatory measures for the foreign exchange market to strengthen market discipline and ensure appropriate risk management in the foreign exchange market, while maintaining an orderly and transparent market environment.
How Do These Measures Support Rupee?
The greatest crutch for the legal tender has probably come from creation of a separate window to meet OMCs dollar demands.
Oil giants, with the likes of Indian Oil Corporation Ltd. (IOCL), Bharat Petroleum Corporation Ltd. (BPCL), Hindustan Petroleum Corporation Ltd. (HPCL), usually buy enormous amounts of dollars to pay their crude oil import bill (which has spiked quite a lot given the West Asia war and energy disruption backdrop).
The Reserve Bank of India has now created a special dollar window and will supply dollars to them through designated banks rather than letting them buy in the open market, reducing pressure on market prices.
The Foreign Exchange Risk Reserve mandates for banks to set aside cash equal to 20% of certain large forex hedge contracts
What it translates into, is more expensive hedging. For instance, if any bank facilitates a large dollar hedge worth Rs 100 crore, it may need to keep Rs 20 crore parked with RBI.
While FERR won't directly curb demand for the US greenback, it can definitely regulate it.
Moreover, the central bank has reduced forex position threshold for firms from $100 million to $5 million, prompting a re-evaluation of their speculative dollar-buying action.
Lastly, the RBI has introduced a rebooking restriction, wherein if someone cancels a rupee-linked hedge contract, they generally cannot immediately create the same contract again. The measure would serve to ease pressure in the currency market, and regulate excessive trading activity.
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