Rupee’s Decline Sparks Restrictions on FX Positions as Authorities Seek Measures to Boost Dollar Inflows.

The Indian rupee has recently closed at a concerning level of 95.28 against the US dollar as of Tuesday, breaching the psychologically significant milestone of 95/$ which has historically set off alarm bells in the market. In response to this decline, the Reserve Bank of India (RBI) has previously imposed restrictions on banks’ net open foreign exchange positions as early as late March. As pressure on the rupee intensifies, particularly in May, traders and analysts are speculating on further interventions by the RBI, particularly measures aimed at Non-Resident Indians (NRIs) designed to attract dollar deposits, which could aid in bolstering the country’s dwindling foreign exchange reserves.

Analyzing historical RBI measures provides critical insight into potential future strategies to stabilize the rupee. For example, during the 2008-09 financial crisis triggered by the Lehman Brothers collapse, the RBI raised FCNR(B) deposit rate ceilings and eased trade credit rules, which effectively reduced onshore dollar demand, stabilizing the rupee from 49-50 to around 44 post-intervention. In 2013, the “taper tantrum” led to the introduction of a special FCNR swap window, which boosted the rupee significantly from 68.8 to roughly 59 in a matter of days. More recently, during the geopolitical upheaval of 2022 arising from the Russia-Ukraine conflict, measures like Special Rupee Vostro Accounts were implemented, allowing for invoicing and trade in rupees, maintaining a more stable rate between 81 and 84 until late 2023.

Looking ahead, the ongoing conflict between the US and Iran has necessitated a revival of stringent measures including capping banks’ net open positions in overseas derivative markets and providing state-owned oil companies with special dollar liquidity support. The rupee, which dipped from 90/$ to 94.83 in March, found a semblance of stability at approximately 92.58 in April following these interventions. However, with the local currency recently hitting a record low of 95.28/$ as of May 5, the need for decisive action from the RBI has never been more urgent. Stakeholders will be closely monitoring any forthcoming policies that aim to restore confidence in the rupee while mitigating foreign exchange volatility amidst a challenging global economic landscape.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)