MUMBAI: Reserve Bank governor Sanjay Malhotra has assured the forex market that the many curbs introduced since late March are in reactions to specific market movements and do not, in any sense, signal any structural change to the central bank’s approach to currency trading.
The statement comes as a big relief for those worried about recent steps taken to curb speculation on the rupee and prop up the local currency, as the central bank says these measures won’t last forever.
“These are reactions to the specific market movements. These are not, in any sense, signalling any structural change,” Malhotra told reporters during the post-policy press conference Wednesday. “This is consistent with our longstanding policy of exchange rates being market determined,” he added.
Over the long term, RBI stands committed to the development, broadening and deepening of the markets and the internationalization of the rupee, Malhotra added.
“...we did notice that in the last few weeks of March there was heightened volatility in the foreign exchange markets. We saw that positions were being built up, leading to arbitrage positions between the non-deliverable forward markets and the deliverable markets,” the governor said.
The first RBI heavy-hand came on March 27, when the RBI capped banks’ net open positions in the domestic market at $100 million at the end of each business day by 10 April. This came after the rupee lost close to 10% YTD and crossed the 95 mark.
The net open position was worth about $40 billion before March 27 and even a Re 1 change would led to banks losing at least Rs 4,000 crore, according to an estimate by Jefferies.
The very next day the rupee began to appreciate but closed again below 95-mark for the first time. This forced the RBI to strike again on April 1 to curb speculation as it prevented banks from rebooking of cancelled forex derivative contracts and tightened norms for related-party transactions and selling it to a corporate. If a company or trader cancels a dollar hedge, they can no longer re-enter the same trade to benefit from price movements, limiting their ability to take directional bets under the guise of hedging.
“In normal times, these linkages are important for an efficient price discovery,” Malhotra said but not when there is too much punting and market volatility.
Reassuring the market, he further said, “the RBI’s endeavour has always been to widen and broaden the forex markets. However, when there is excessive volatility and excessive building-up of positions, which only increase volatility and don’t help in real price discovery, such kinds of measures are taken.”
Following the April 1 curbs, the rupee made its best single-day rally of notching up 1.8% and Wednesday the unit continued to gain and closed below 92.20.
Experts said the RBI’s comments about the rupee showcased strong confidence-building measures to manage exaggerated moves while maintaining its stance of not targeting particular levels of the rupee.
“The rupee could find some stability over the coming days along with some cooling off in the 10-year bond yields with a 6.8-7% range likely to emerge,” said Sakshi Gupta, principal economist at HDFC Bank.
Others see support for the rupee on the back of a temporary ceasefire between the US and Iran.
“With respect to the rupee, some easing of geopolitical uncertainties following the ceasefire should provide some support to the currency. However, the RBI is likely to remain vigilant and continue its efforts to curb excessive volatility in the foreign exchange market,” said Rajani Sinha, chief economist at Care Ratings. She expects the rupee to average at 92-93 levels in FY27 if global crude prices average $90 a barrel.
Malhotra said despite stronger macroeconomic fundamentals, the rupee’s depreciation in the previous financial year was more than the average of the previous years. Safe haven flows, he said, have exerted depreciation pressure on the currencies of major economies as the US dollar strengthened.
According to Malhotra, the RBI stands committed to this policy and would judiciously continue to contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is warranted by fundamentals.