Mumbai, Oct 12: The Indian rupee gained 91 paise to trade at 95.80 against the US dollar in early trading on Monday. The sharp recovery came after the Reserve Bank of India (RBI) announced several measures to reduce volatility in the foreign exchange market and control excessive demand for dollars.
The rupee had recently fallen to a record low against the US dollar. Market experts believe the RBI’s latest steps could help stabilise the Indian currency despite high crude oil prices and continued strength in the dollar.
RBI Introduces New Measures to Control Rupee Volatility
On Saturday, the Reserve Bank of India announced a series of measures aimed at reducing pressure on the rupee. These included a dedicated dollar window for oil marketing companies through designated banks and higher costs for certain foreign exchange hedging transactions.
The measures are intended to reduce demand for dollars in the spot market and discourage speculative positions in the currency market.
In its October 10 circulars, the RBI also introduced tighter rules for rupee-linked foreign exchange derivative contracts.
The central bank prohibited authorised dealers from allowing traders to rebook cancelled rupee-linked foreign exchange derivative contracts. However, rollovers at maturity remain permitted under existing regulations.
RBI Tightens Foreign Exchange Derivative Rules
The RBI reduced the threshold 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.
The central bank also introduced a Foreign Exchange Risk Reserve (FERR). Under this measure, authorised dealers must maintain a cash reserve with the RBI equal to 20 per cent of the rupee equivalent of the notional amount of qualifying rupee-linked foreign exchange derivative contracts exceeding USD 2 million.
The requirement applies to specified transactions used to hedge current account exposures involving the purchase of foreign currency against the rupee.
According to the RBI, these steps aim to strengthen market discipline, improve risk management and maintain an orderly and transparent foreign exchange market.
Rupee Recovers After Hitting a Record Low
At the interbank foreign exchange market, the rupee opened stronger at 95.61 against the US dollar on Monday. It later pared some of its gains to trade at 95.80, marking a rise of 91 paise from its previous close.
On Friday, the Indian currency had closed at 96.71 against the dollar, gaining 17 paise. A day earlier, it had weakened by 13 paise to close at a record low of 96.88.
The latest recovery indicates a positive initial response to the RBI’s measures, although the rupee’s future movement will depend on global market conditions, dollar demand and crude oil prices.
US Dollar Index Edges Lower
The US dollar index, which measures the dollar’s strength against a basket of six major currencies, declined 0.08 per cent to 101.94 during early trade.
A weaker dollar index can provide some support to emerging market currencies, including the Indian rupee. However, domestic demand for dollars and international economic developments also influence the exchange rate.
Crude Oil Prices Remain Above USD 100 Per Barrel
Brent crude, the global oil benchmark, fell 1.54 per cent to USD 103.11 per barrel in futures trading.
Despite the decline, crude oil prices remained elevated. Higher oil prices can put pressure on the Indian rupee because India imports a significant share of its crude oil requirements and needs dollars to pay for these imports.
The RBI’s dedicated dollar window for oil marketing companies is intended to help manage their foreign exchange requirements and reduce additional pressure on the spot currency market.
Sensex Falls While Nifty Trades Marginally Higher
Indian stock markets showed a mixed trend during early trading on Monday.
The BSE Sensex declined 20 points, or 0.03 per cent, to 72,452.33. Meanwhile, the NSE Nifty rose 7.95 points, or 0.04 per cent, to 22,529.85.
Foreign Institutional Investors (FIIs) continued to put pressure on the equity market. According to exchange data, foreign investors sold Indian equities worth Rs 3,568.90 crore on a net basis on Friday.
Foreign investment flows can influence currency demand, particularly when overseas investors convert funds between rupees and foreign currencies.
India’s Forex Reserves Decline by USD 12.952 Billion
Data released by the Reserve Bank of India on Friday showed that India’s foreign exchange reserves declined by USD 12.952 billion to USD 734.606 billion in the week ended October 2.
The reserves had already fallen by USD 18.343 billion to USD 747.557 billion in the previous reporting week ended September 25.
Changes in foreign exchange reserves can reflect several factors, including valuation movements and the RBI’s foreign exchange operations. The latest figures come as the central bank introduces measures to manage volatility in the currency market.
What Lies Ahead for the Indian Rupee?
The rupee’s recovery to 95.80 against the US dollar marks a significant rebound from its recent record low. The RBI’s new foreign exchange regulations may help moderate speculative activity and reduce pressure on dollar demand.
However, persistently high crude oil prices, foreign investor outflows and changes in global dollar strength remain important factors to watch.
Market participants will closely monitor the impact of the RBI’s measures and developments in international financial markets to assess whether the Indian currency can sustain its recovery.
