Rupee Falls Below 95 per Dollar Despite Central Bank's Forex Position Limits

Indian Rupee Falls to Record Low Despite RBI's Directive

Market Update The Indian rupee reached a new record low on March 30, trading at Rs 95.23 to the dollar before recovering marginally to Rs 94.83. The Reserve Bank of India's (RBI) directive to limit banks' net open positions in the Indian currency (NOP-INR) to $100 million by April 10 has not had the desired effect.

RBI Directive On March 27, the RBI directed all banks to limit their NOP-INR in the onshore deliverable market to $100 million by April 10. This move is an attempt to curb excessive volatility in the rupee. The directive applies to all banks, but corporates with large treasury books are expected to take advantage of disparities in onshore and offshore markets to hedge their positions.

Market Reaction The rupee's movements continue to be influenced by global macro factors, including Brent crude prices and foreign investor outflows from Indian equities. Despite the RBI's directive, market participants remain wary of global developments and expect the rupee to remain under pressure.

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RBI's Concerns The RBI's urgency in issuing the directive reflects its mounting concerns over the rupee's volatility, which has seen multiple record lows in recent trading sessions. The RBI has been intervening in the spot, forwards, and non-deliverable forwards (NDF) markets to bring semblance to the rupee's movements, but to no avail. As a result, the RBI's forex reserves have depleted to around $700 billion.

Previous RBI Moves The RBI has taken similar measures in the past to curb currency volatility. In 2011, the RBI curbed net open positions in the Indian rupee by 75 percent for certain banks and 50 percent for large-cap banks. In 2013, the RBI instructed banks to slash their NOP limits to around $5 million or near-zero levels to prevent excessive speculation.

Impact on Banks Banks are expected to experience mark-to-market losses in their treasury books as they wind down their aggressive long bets on the rupee by selling off the greenback. Although the RBI has given a deadline of April 10, bank treasury heads have requested an extension, which seems unlikely at this point.