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RBI Relaxes Forex Trading Rules
The central bank's updated rules, effective Tuesday, allow banks to proceed with specific currency transactions involving related parties. These include unwinding existing contracts and conducting matched trades. This partial rollback permitted currency traders to once again buy the rupee in the domestic market and sell it overseas. This activity contributed to the rupee's 0.4% drop for the day.
Traders Return, Rupee Weakens
The rupee closed at 93.50 against the dollar, down from 93.12 in the prior session. "The rupee weakened as currency traders resumed buying domestically and selling abroad, although the impact was limited," commented Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors LLP. He added that the rupee is not expected to fall significantly despite the partial easing.
Why Curbs Were First Imposed
These restrictions were first put in place on March 27 after the rupee hit a record low. This followed an oil price shock linked to the West Asia conflict. Before these measures, market watchers estimated that banks held around $30 billion to $35 billion in outstanding currency contracts. Oil refiners also received support through special channels for acquiring dollars.
Outlook: Curbs Likely to Limit Sharp Moves
Although some rules have been eased, significant restrictions remain on currency derivative deals involving related parties, along with a $100 million limit on open positions. Experts believe these ongoing restrictions will prevent any steep decline in the rupee. The cost of hedging rupee risk for one year (the forward premium) dropped by about 30 basis points following the RBI's announcement, though it later recovered. Traders observed that the offshore rupee market (NDF) showed only a slight premium compared to the wide gap seen during the period of high volatility after the initial curbs.