RBI doubles down on curbing rupee speculation after initial moves fall short

The Reserve Bank of India has intensified its crackdown on speculative activities in the rupee, this time targeting corporate arbitrage after its initial clampdown on banks failed to ease pressure on the currency.

Late on Wednesday, the Reserve Bank of India barred banks from offering rupee non-deliverable forwards to resident and non-resident customers. It further stated that companies cannot rebook canceled forward contracts.

The central bank’s series of moves comes at a time when the rupee has hit an all-time low due to concerns over spillovers from the Iran war. The currency fell 4.24% in March, marking the worst monthly decline in six years.

Earlier this week, the RBI put a $100 million cap on banks’ net open rupee positions. However, it failed to offer currency relief to corporates and banks exited the positions, Reuters reported.

RBI’s latest move now targets this rise in corporate arbitrage.

By forcing banks to reduce their positions, the central bank opened up arbitrage between the onshore and NDF markets that corporates exploited, putting renewed pressure on the rupee and dampening the impact of the initial measures, three bankers said.

One banker said corporate arbitrage flows at his bank alone are estimated at $750 million-$800 million. He and the other bankers requested anonymity, citing restrictions on speaking to the media.

The rupee had crossed 93 in the interbank market on Monday after RBI’s crackdown on banks but quickly fell to an all-time low of 95.

The RBI did not respond to an email requesting comment.

Action on speculative activity

Further, the central bank’s ban on banks from rebooking any foreign exchange derivative contracts on behalf of customers, whether deliverable or deliverable, has been revoked after April 1.

Hitherto, corporates would book forward contracts to hedge their dollar exposure. If the exchange rate later moves in his favor, he can cancel the contract and book a profit. With the underlying exposure still outstanding, it was allowed to enter into new forward contracts again, effectively repeating the cycle.

“All this fundamentally reduces speculation,” said Dheeraj Nim, FX strategist and economist at ANZ Bank. However, the bottom line is that if oil prices stay where they are, “your current account remains strained and capital flows remain low”, he added.

“It may not reverse the rupee’s course but it does facilitate the central bank’s objective of curbing excess volatility.”

The central bank further restricted banks from entering into FX derivative contracts with related parties.