The Reserve Bank of India (RBI) has introduced new measures to shore up the rupee amid record-low levels, high oil prices, and foreign investor outflows. The central bank opened a dollar window for state-owned oil refiners and tightened foreign-exchange derivative rules, marking some of its strongest actions since the 2013 taper tantrum. These steps follow an interest rate hike earlier in the week, signaling the RBI's commitment to monetary tightening.
The rupee is expected to rally when trading resumes, with analysts eyeing the 97-per-dollar level as a key defense line. However, sustaining gains may be challenging due to persistently high oil prices and the $30 billion pulled from Indian equities this year. G. Mahalingam, a former RBI executive director, noted that the central bank is building multiple layers of defense as external pressures mount.
The RBI has already taken steps to bolster its foreign-exchange reserves, including a diaspora deposit program that raised $133 billion. However, reserves have since dwindled by $51 billion in the past four weeks. The rupee has weakened 7% this year, the worst performance in Asia, closing slightly above its record low of 96.9650 per dollar on Friday.
The latest measures include a foreign-exchange risk reserve requiring lenders to hold 20% of the notional value of derivative transactions above $2 million, similar to China's approach. The RBI also canceled the rebooking of forward contracts and lowered the limit on derivative transactions without proof of an underlying asset. While these steps may steady the rupee, they could also increase hedging costs for companies managing currency exposure.
Analysts warn that the measures address demand for dollars but do not ease pressures from energy prices and capital flows. Dhiraj Nim, forex strategist at Australia & New Zealand Banking Group, stated that oil prices and capital flows will ultimately decide the rupee's direction. The coming week's reserves data and rupee movements will indicate the effectiveness of these measures.