RBI Tightens Rules on Forex Derivatives to Protect Sliding Rupee

The Reserve Bank of India has tightened rules in the foreign exchange derivatives market to curb speculation and support the rupee as it nears the 97 mark against the dollar. Crude oil prices are also staying above 100 dollars per barrel, adding pressure to the local currency.

New Limits

The central bank has slashed the limit for currency derivative transactions without an underlying exposure from 100 million dollars down to 5 million dollars across authorised dealers and stock exchanges. This is a 95 per cent cut that stops traders from making large bets without real economic needs. The RBI also banned the rebooking of cancelled rupee derivative contracts and set up a new Foreign Exchange Risk Reserve. Banks must now keep a cash reserve equal to 20 per cent of the value for certain large derivative contracts exceeding 2 million dollars.

Wider Pressures

India's forex reserves fell by 12.95 billion dollars to 734.60 billion dollars in the week ending October 2. Retail inflation is expected to reach 5.2 per cent in the 27 financial year, and the RBI already hiked repo rates by 25 basis points to 5.50 per cent on October 7. On October 9, the rupee closed near 96.73 per dollar despite heavy FCNR inflows crossing 143 billion dollars.

Context

Central banks use currency rules and interest rates to manage sudden economic shocks and protect the value of local money from global market swings. When import costs rise due to expensive oil and a weak currency, ordinary goods in the country tend to get more expensive over time.