Rupee opens at 95.76 against dollar after RBI announces four measures

The rupee, which has struggled against the dollar for many days, got some relief on Monday. The Indian currency strengthened by Re 1 against the US dollar from its previous close. It had closed at 96.73 on Friday, and opened on Monday 97 paise higher at 95.76 to the dollar. The rupee performed better than other Asian currencies, most of which were trading in a limited range.

Two major factors were weighing on the Indian currency. The first was dollar demand from oil companies in the spot market. The second was hedging bets placed by companies in anticipation of the rupee weakening further. The Reserve Bank of India took some important steps to deal with both.

At the end of the week, the RBI announced four measures. They are a special dollar supply facility for three state-run oil companies, tighter curbs on foreign exchange derivatives, a 20 per cent cash reserve requirement for certain currency contracts, and stricter daily cash reserve rules for banks. The steps have given the rupee immediate relief, yet the currency has weakened 6.6 per cent so far this year. Rising crude oil prices, outflows by foreign institutional investors (FII) and weak capital inflows continue to put pressure on the rupee.

The first measure concerns foreign exchange derivatives rules. The RBI has barred the cancellation and rebooking of rupee-linked foreign exchange derivative contracts, so that such deals cannot be used for speculation in the name of hedging. For over-the-counter foreign exchange derivative deals with no underlying exposure, the limit has been cut from $100 million to $5 million. Companies will also have to certify that the same exposure has not been hedged through another bank. If they have used several banks, they will have to disclose the amount hedged, which will reduce the scope for synthetic over-hedging.

The second measure is for state-run oil companies. From today, the RBI will meet the entire daily dollar requirement of IOCL, BPCL and HPCL through designated banks. This will reduce their demand in the interbank spot market. According to Nomura's estimates, India's monthly oil import bill averaged $16.4 billion between April and August, of which these three state-run oil companies accounted for about 55 per cent. The special facility thus covers a large part of the dollar demand arising from one of the country's biggest import categories. It immediately improves the balance of supply and demand in the spot market, and reduces the risk of the rupee weakening further during the day because of large oil-related dollar purchases.

The third measure is a 20 per cent foreign exchange exposure reserve. Under the new rule, authorised dealers will have to keep with the RBI a cash reserve equal to 20 per cent of the rupee value of every rupee-linked foreign exchange derivative contract above $2 million. The reserve will have to be maintained daily until the contract ends. For a $10 million hedge, worth about Rs 100 crore at a dollar rate of 100, banks will have to set aside Rs 20 crore. This raises the cost of funding a currency position and may discourage excess hedging or speculation against the rupee.

The fourth measure is stricter rules on daily maintenance of the cash reserve ratio (CRR). From the fortnight beginning October 16, banks will have to hold at least 99 per cent of their required cash reserve every day, compared with 90 per cent earlier. The main CRR rate will remain 3 per cent, but banks will have less flexibility in managing daily liquidity. The decision will tighten liquidity slightly and may rein in short-term currency speculation.