MUMBAI, Oct 12 (Reuters) – The Indian rupee surged 1% at open on Monday after the central bank alleviated pressure on the currency by diverting oil companies’ dollar purchases away from the spot market and moved to temper corporate demand for forward dollars.
The rupee opened at 95.76 to the dollar, having settled at 96.73 on Friday. The currency was a standout performer in Asia’s foreign-exchange markets, with most regional peers trading in a narrow range. Despite the rally, the currency is still down 6.6% this year.The Reserve Bank of India on Saturday unveiled a series of measures aimed at addressing two key sources of pressure on the rupee: persistent dollar demand from oil marketing companies, which has been amplified by high crude prices, and demand from corporates seeking to hedge against further currency weakness.
Expectations of further weakness had encouraged importers to step up purchases of forward dollars to protect against higher future costs.
That hedging demand, in turn, added to strain on the currency, creating a cycle of expectations of depreciation, increased hedging and further weakness.RBI STEPS UP
The RBI barred firms from rebooking cancelled rupee-linked derivatives, slashed the threshold for transactions without underlying exposure and mandated that banks set aside 20% cash against certain FX contracts, potentially raising the cost of hedging against rupee weakness.
The package raises the near-term cost of rupee depreciation trades, Citi said in a note.
The measures do not apply to all foreign-exchange transactions, but only current account transactions, bankers said. The 20% cash requirement does not cover companies hedging external commercial borrowings or foreign portfolio investors hedging their investments in India.
RALLY FACES A TEST
While the rupee has rallied sharply in the aftermath of the RBI’s measures, the sustainability of the recovery would depend on whether underlying pressures let up, analysts say.”Beyond the initial impact, the rupee’s trajectory will continue to be shaped by crude oil prices, foreign portfolio flows and the broader direction of the US dollar,” Societe Generale said in a note.
Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala
