RBI Unveils Two-Pronged Intervention to Prop Up Rupee, Tightens Derivatives Rules

The Reserve Bank of India on Saturday introduced a comprehensive package aimed at relieving pressure on the rupee as the currency traded close to its all-time low, curbing speculative dollar demand while directly removing one of the largest sources of spot market buying.

The rupee closed at 96.73 against the dollar on Friday, near the record low of 96.96 touched in May. It has lost about 7% this year, making it one of the worst performing Asian currencies, according to a report in the Economic Times.

The central bank will open a special window from Monday, October 12, to meet the entire daily dollar requirements of three state-run oil marketing companies – Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. Under the arrangement, the RBI will sell U.S. dollars directly from its foreign exchange reserves through designated banks, taking these firms’ substantial demand out of the spot market where it typically creates volatility.

“Addressing oil companies’ dollar requirements removes one of the largest sources of demand from the FX market, which should help reduce volatility, but it will show up in a depletion of reserves,” Dhiraj Nim, FX strategist at ANZ Bank in Mumbai, told Reuters.

**Derivatives Crackdown**

Alongside the oil window, the RBI tightened rules on foreign exchange derivatives. It slashed the limit for positions in exchange-traded currency derivatives involving the rupee without establishing underlying exposure to $5 million from $100 million, across all authorised dealers and stock exchanges combined.

The central bank also barred dealers from allowing users to rebook any cancelled forex derivative contracts involving the rupee, whether deliverable or non-deliverable. Rollovers on maturity remain permitted under existing regulations.

A new “Foreign Exchange Risk Reserve” (FERR) requirement was introduced for rupee-involving derivative contracts used to hedge current account transactions with a notional value exceeding $2 million equivalent. Authorised dealers must maintain a cash reserve with the RBI equal to 20% of the rupee equivalent of the notional amount for each eligible transaction.

“The measures are intended to strengthen market discipline and ensure appropriate risk management in the foreign exchange market, while maintaining an orderly and transparent market environment,” the RBI said in a circular, as reported by the Economic Times.

A person familiar with the central bank’s thinking told Reuters the steps aim “to moderate potentially destabilising derivative demand, improve the integrity of underlying exposure verification and discourage circumvention through multiple transactions or repeated rebooking.”

**Market Reaction and Reserves Impact**

The rupee strengthened by about 0.6% against the dollar in the non-deliverable forward market after the announcement, albeit in thin trading, according to Swarajya magazine. The one-month dollar-rupee contract fell approximately 40 paise.

Bankers said the 20% FERR levy would significantly raise the cost of hedging for importers. “This additional cash requirement means buying dollars for importers becomes not only very expensive but also heavy on working capital requirements,” Anshul Chandak, head of treasury at RBL Bank, told the Economic Times.

The measures come as India’s foreign exchange reserves continue to decline. Data released Friday showed reserves fell by $12.95 billion to $734.60 billion in the week ended October 2, the fourth consecutive weekly drop. Foreign currency assets declined by $10.66 billion to $604.74 billion, while gold reserves fell by $2.28 billion to $106.41 billion, according to an Economic Times report. Total reserves are now about $51 billion below the record high of $785.70 billion touched in early September.

The RBI has already deployed over $140 billion in capital inflows through one-off policy steps to encourage overseas FX deposits and offshore borrowing by state-run firms and banks, Reuters reported. Despite sustained central bank intervention and a rate hike earlier in the week, the rupee has remained under pressure.

ANZ’s Nim cautioned that the steps should temper, but not eliminate, pressure on the rupee. “The underlying drivers, including oil prices and capital flows, remain, and the real test will be how reserves and the rupee behave in the coming week,” he told Reuters.