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The Reserve Bank of India's (RBI) new foreign exchange rules are expected to raise hedging costs for importers and reduce excessive demand for dollars, easing pressure on the rupee, according to a report by ICICI Bank.
The report said the measures are aimed at curbing dollar demand arising from currency hedging by importers, which has remained strong even as exporters have stayed on the sidelines and forward premia have increased over recent months. "With the new measures, RBI has made it more expensive for importers to hedge. Also, the volume in the market should see a decline given cancellation and rebooking of contracts are not going to take place," the report said. The RBI has introduced several regulatory measures to stabilise the rupee, which has faced persistent depreciation pressure. These include restrictions on the cancellation and rebooking of foreign exchange derivative contracts, a reduction in the threshold for undertaking derivative transactions without documentation to USD 5 million from USD 100 million, and additional documentation requirements to ensure that the same exposure is not hedged multiple times. The central bank has also introduced a foreign exchange risk reserve requirement of 20 per cent for specified import-related current account derivative transactions exceeding USD 2 million. In addition, a special window has been provided to public sector oil marketing companies to meet their dollar requirements. According to the report, these measures could reduce transactions driven by expectations of further rupee depreciation, rather than only genuine business requirements. The report noted that importers have been actively hedging against the risk of rupee depreciation, while exporters have been waiting rather than selling dollars. This has created an imbalance in hedging activity and added to demand for the US currency. "All of these measures put together should ensure that the hedging ratio should move towards an equilibrium and thus cool off the demand for Dollars and thus the depreciation pressure on the currency," the report said. Separately, the foreign exchange risk reserve requirement, together with the RBI's decision to increase the daily cash reserve balance requirement from 90 to 99 per cent of the prescribed cash reserve ratio requirement, is estimated to sterilise around 0.4-0.6 per cent of net demand and time liabilities (NDTL). The report said these measures had pushed bond yields higher. However, ICICI Bank cautioned that the longer-term direction of the rupee would depend on capital flows and crude oil prices. While the special window for oil marketing companies removes their dollar demand from the regular market in the immediate term, sustained currency stability will depend on broader external conditions. (ANI)
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