The rupee’s weakness is largely an energy story: high crude prices have swollen India’s import bill and dollar demand, and the RBI’s special window for oil marketing companies is an admission that fuel purchases are a core source of pressure. That makes the rally vulnerable to any renewed rise in crude, including from weekend attacks on Saudi infrastructure. Higher hedging costs should ease near-term dollar buying and pull forward premiums lower, offering some support to Asian currencies more broadly. Sustained gains likely depend on foreign equity outflows slowing, since administrative curbs have historically offered only temporary relief.
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The RBI has made it more expensive to bet against the rupee, but it can’t make oil any cheaper.
Summary:
- The rupee surged in the offshore non-deliverable forward market, signalling a rally of about 1% from Friday’s close near 96.7 per dollar when onshore trading opens Monday
- The RBI is asking banks to hold reserves against large hedges and limiting the rebooking of cancelled rupee derivative contracts
- Bankers say the measures could raise hedging costs by 80 to 150 basis points
- Corporate forward-dollar purchases hit a record $77 billion in September, up 80% from a year earlier
- The RBI is also letting oil marketing companies buy dollars directly from the central bank through a special window
- The rupee, down nearly 7% this year, came close to its record low of just under 97 last week
The Indian rupee is set for a sharp rebound on Monday after the Reserve Bank of India stepped up efforts to curb dollar demand, with offshore trading pointing to a gain of about 1% from Friday’s close near 96.7 per dollar.
The one-month dollar/rupee non-deliverable forward contract signalled the rupee could rally past 96 when onshore markets open at 9 am in Mumbai (03:30 GMT, 11:30 pm ET Sunday). Non-deliverable forwards are offshore contracts settled in dollars, allowing investors to trade the rupee outside India and often giving an early read on where the currency will open.
The rally follows new RBI measures aimed at slowing a surge in corporate hedging against further rupee weakness. Banks will be asked to hold reserves against large hedges, and the common practice of cancelling and rebooking rupee-linked derivative contracts will be restricted. Six bankers said the measures could raise hedging costs by 80 to 150 basis points, depending on how much banks pass on to clients, and are designed to make speculative positioning harder.
The scale of hedging shows why the RBI acted. Corporate purchases of forward dollars rose to a record $77 billion in September, up 80% from a year earlier, while sales were far smaller at $41 billion, adding to pressure on the currency. The curbs caught markets off guard, with bankers working through the weekend to put systems in place for Monday’s open.
The central bank has also opened a special window allowing oil marketing companies to buy dollars directly from it, targeting one of the largest sources of daily dollar demand. India imports most of its crude, so the surge in oil prices tied to the Middle East conflict has fed directly into its import bill.
The rupee has been Asia’s worst-performing currency this year, down nearly 7%, under pressure from high oil prices and heavy foreign outflows from Indian equities. It came close to its record low of just under 97 last week, despite about $140 billion raised through special dollar deposit schemes and higher interest rates.
A currency adviser cautioned that such measures have historically had limited staying power unless the underlying pressures ease. Whether the rally holds is likely to depend on the path of oil prices and foreign investment flows rather than on the RBI’s latest curbs.
This article was written by Eamonn Sheridan at investinglive.com.