Sebi and RBI tighten currency rules to protect the falling rupee

The Securities and Exchange Board of India and the Reserve Bank of India have joined forces to protect the domestic currency by tightening limits on foreign exchange trading. Under the updated framework, investors can now take unhedged positions of up to five million dollars across all stock exchanges without proving an underlying asset, a sharp drop from the previous one hundred million dollar limit. Foreign portfolio investors face strict conditions under the new norms. While short positions across all contracts in foreign currency and rupee pairs cannot cross the five million dollar mark, anyone wanting a larger long position must prove underlying exposure to Indian debt or equities, including mutual fund units. The central bank also issued a separate directive allowing three state-run petroleum companies—Indian Oil Corp, Hindustan Petroleum Corp, and Bharat Petroleum Corp—to meet their daily dollar needs directly through designated banks. These strict measures arrive as the rupee struggles against ongoing pressures. The currency has lost nearly five percent of its value against the American dollar over the past year due to foreign investor outflows, high global crude oil prices, and trade uncertainties. Conflict in West Asia has pushed oil costs higher, increasing local demand for dollars because the country buys most of its crude from abroad.

Context

Currency derivatives let investors trade contracts based on future exchange rate movements without buying the actual currency. When global oil prices climb or foreign funds pull out, local currencies often weaken because importers need more dollars to pay for essential supplies. Regulatory bodies use trading limits to stop heavy speculation that can worsen currency drops during periods of global market stress.