Abstract：India's central bank has tightened rules on rupee-linked foreign exchange derivatives and opened a dedicated dollar window for the country's state-owned oil marketing companies, steps aimed at curbing speculative dollar demand as the rupee trades close to its record low. According to aliceblueonline.com, the measures are expected to limit speculative activity in the currency market and keep the rupee in a stable range, with analysts cited in its report estimating a gain of about 1 percent for the currency.
India's central bank has tightened rules on rupee-linked foreign exchange derivatives and opened a dedicated dollar window for the country's state-owned oil marketing companies, steps aimed at curbing speculative dollar demand as the rupee trades close to its record low. According to aliceblueonline.com, the measures are expected to limit speculative activity in the currency market and keep the rupee in a stable range, with analysts cited in its report estimating a gain of about 1 percent for the currency.
ContentsThe Reserve Bank of India announced the measures through circulars issued on October 10. Under the revised framework, authorised dealers can no longer allow users to rebook rupee-linked foreign exchange derivative contracts once they have been cancelled. Rollovers at maturity remain permitted under existing regulations.
The central bank also cut the limit for foreign exchange derivative transactions that can be undertaken without establishing an underlying exposure, from USD 100 million to USD 5 million. The revised threshold applies across authorised dealers and recognised stock exchanges. In simple terms, an underlying exposure is a real business need, such as an importer's actual dollar payable, rather than a position taken purely to bet on the currency.
The third and most consequential change is a new Foreign Exchange Risk Reserve, or FERR. Authorised dealers must hold cash with the central bank equal to 20 percent of the rupee equivalent of the notional value of each rupee-linked derivative contract exceeding USD 2 million, where the transaction hedges current account exposure involving the purchase of foreign currency against the rupee. The RBI said the measures were intended to strengthen market discipline, ensure appropriate risk management and maintain an orderly and transparent foreign exchange market.
Alongside the derivative curbs, the RBI introduced a special facility to meet the dollar requirements of Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation. Effective October 12, the arrangement allows the central bank to supply dollars to these companies through designated banks, reducing their demand in the open foreign exchange market. The facility will continue until further notice.
Oil marketing companies are among India's largest buyers of dollars, since crude oil is priced and settled in the US currency. Routing their purchases through the central bank is intended to take that demand out of the spot market, where the rupee's exchange rate is set. Analysts cited in the aliceblueonline.com report described the window as an effective way to manage dollar liquidity and help arrest the rupee's decline.
The rupee closed at 96.73 against the US dollar on the Friday before the measures were reported, close to its record closing low of 96.82. It had touched an all-time intraday low of 96.96 in May and has depreciated nearly 7 percent over the year, making it one of Asia's worst-performing currencies. The RBI has cited foreign capital outflows, rising crude oil prices and strong dollar demand as the pressures behind its intervention.
The currency backdrop also includes monetary tightening. The RBI raised its repo rate, the rate at which it lends to banks, by 25 basis points at its October policy meeting and shifted its stance to calibrated tightening. IDFC FIRST Bank said that if the new measures ease depreciation pressure by curbing speculative demand and changing hedging behaviour, the central bank could take a gradual approach to further rate increases, and it expects the terminal repo rate in the range of 6 to 6.25 percent.
The 20 percent reserve requirement is expected to make some hedging transactions more expensive, which could discourage speculative positions and reduce dollar demand in the spot market. Kotak Mahindra Bank estimates that hedging costs could rise by 1 to 1.6 percent, while IDFC FIRST Bank expects an increase of around 1.5 percent. The primary report notes that banks may pass these higher operating costs on to corporate clients, and that importers could face added pressure on working capital.
For a forex beginner, a forward premium is the difference between the forward exchange rate and the spot rate, effectively the price an importer pays to lock in a future dollar rate. The two effects pull in opposite directions: higher bank costs could push premiums up, while weaker importer demand for hedging could pull them down. The primary report describes the resulting market picture as mixed.
Kotak Mahindra Bank said the immediate reaction on the rupee is expected to be very favourable, adding that a move of USDINR towards sub-95 cannot be ruled out and that forward premia are likely to soften as oil marketing companies and other importer hedging gets contained. IDFC FIRST Bank also expects the measures to lower the USD/INR exchange rate and forward premiums in the near term, while noting that global conditions and balance-of-payments dynamics will shape the currency's medium-term path.
The measures may also drain banking system liquidity. IDFC FIRST Bank estimates that core liquidity surplus could fall to around Rs 2 lakh crore by March 2027 from Rs 10.4 lakh crore on October 2. Kotak Mahindra Bank estimates the steps could withdraw around Rs 1.5 lakh crore of durable liquidity if they remain in force for another month. Separately, the RBI has announced an open market sale of government securities worth Rs 25,000 crore for October and raised the daily maintenance requirement for the Cash Reserve Ratio to 99 percent from 90 percent.
IDFC FIRST Bank cautioned that relief to the rupee could be limited if external pressures persist, identifying elevated crude oil prices, foreign portfolio outflows and weak underlying capital flows as factors that could continue to weigh on the currency. The primary report likewise notes that the sustainability of any rupee recovery will depend on crude oil prices, foreign investment flows and global currency movements.
The primary report flags execution risk for mid-sized companies managing import costs, and liquidity risk if the rebooking restriction reduces market depth and widens bid-ask spreads, the gap between buying and selling prices. It also notes that a stronger rupee could put some pressure on earnings conversion for export-oriented sectors such as information technology and pharmaceuticals, while banks could see pressure on fee income and margins as derivative volumes fall and compliance costs rise.
Bankers expect the measures to reduce speculative dollar demand and support the rupee when trading resumes. For readers tracking the currency, the items to watch include the volume of dollars bought by oil marketing companies through the special window, the path of forward premiums and bid-ask spreads, and the flow of foreign portfolio investment into Indian markets.
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India's foreign exchange reserves have fallen by roughly $60 billion in six weeks as the Reserve Bank of India (RBI) sold dollars aggressively to slow the rupee's slide, The Economic Times reported. The rupee was described as one of Asia's worst-performing currencies over that stretch.
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