Government Endorses RBI's Crackdown on Currency Trading

India's Government and Central Bank United in Efforts to Stabilize Rupee

The Indian government is reportedly supporting the Reserve Bank of India's (RBI) aggressive measures to crack down on currency speculation, according to people familiar with the matter. This suggests that authorities will maintain their approach despite lobbying from lenders to ease the restrictions.

The Ministry of Finance and the RBI are aligned in their strategy to stabilize the rupee, with authorities not targeting a specific level for the currency. State-run banks have been advised to refrain from speculative positions in offshore markets when the rupee is under pressure. These banks have seen their profits grow in recent years and should not be complaining about the action taken.

India's finance ministry did not respond to an email seeking comment. The RBI has taken some of its boldest steps in more than a decade to curb currency speculation and cushion the rupee after its plunge to record lows. On Wednesday, the central bank imposed restrictions on non-deliverable derivative contracts, threatening to squeeze a $149 billion-a-day offshore trading market. Late last week, it shocked banks by capping their daily currency positions.

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The rupee advanced as much as 2% to 92.8262 per dollar on Thursday, the most since September 2013, as trading resumed after a two-day break. The gains came despite broad weakness in most regional currencies as US President Donald Trump signaled an escalation in the conflict with Iran.

Comparison of Key Economic Indicators

Officials are closely monitoring the situation and the currency, and are ready to take further steps if needed. They do not view the current situation in the same light as the taper tantrum period in 2013, with India's economy in better shape now than it was back then.

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India has been among the hardest hit by the Iran conflict and the virtual closure of the Strait of Hormuz, due to its status as the world's third-largest oil consumer and a major importer of gas from the Middle East. The additional demand for dollars to pay for a higher oil bill is putting the currency under pressure.

The RBI has other technical tools at its disposal to bolster the rupee, and will likely continue to draw down its foreign exchange reserves to stabilize the currency.