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The Indian rupee appreciated 60 paise to open at 95.17 against the US dollar on Tuesday (October 13), compared with Monday’s (October 12's) close of 95.77, after the Reserve Bank of India (RBI) announced additional measures to curb dollar demand and ease pressure on the domestic currency.
The sharp opening gain follows a series of steps by the central bank to restrict certain foreign-exchange transactions and tighten rules governing derivatives linked to the rupee.
The RBI has also intervened directly in the currency market by selling dollars to support the rupee, according to traders.
The latest measures come amid sustained pressure on the domestic currency. While regulatory restrictions and intervention can influence near-term currency movements, their effectiveness will also depend on the underlying demand for dollars and broader market conditions.
What has the RBI changed?
The RBI has expanded the scope of a cash deposit requirement introduced recently for foreign-exchange hedging transactions. The requirement will now cover all such transactions, including those used by banks to hedge their own assets and liabilities.
The central bank has also tightened rules for banks offering non-deliverable foreign-exchange derivatives to clients.
Under the revised rules, lenders with units in India's Financial Services Centre (IFSC) and certain primary dealers, which were earlier permitted to offer non-deliverable rupee derivatives to non-residents for any purpose, can now offer these products only for hedging, the RBI said.
Non-deliverable derivatives allow participants to take positions on currency movements without physically exchanging the currencies involved. Such instruments can be used to hedge currency exposure, but can also be used to take speculative positions.
By restricting the permitted use of these derivatives and expanding the deposit requirement, the RBI is seeking to curb transactions that add to dollar demand or pressure on the rupee.
Why is the rupee gaining?
The rupee's 60-paise opening appreciation reflects the impact of the RBI's latest measures and its intervention in the foreign-exchange market, according to the information available from traders.
When the RBI sells dollars in the market, it increases the supply of the US currency available to buyers. This can help moderate dollar demand relative to supply and support the rupee.
Restrictions on certain derivative transactions may also reduce opportunities to build positions in the rupee outside the permitted hedging framework. The expanded cash deposit requirement could raise the cost of undertaking covered transactions.
However, the opening move does not, by itself, establish whether the rupee's gains will be sustained through the trading session or over a longer period.
Can the RBI's measures support the rupee for long?
The RBI's interventions and regulatory measures can influence short-term currency movements, but their longer-term impact will depend on the factors driving pressure on the rupee.
A senior treasury official at a bank said the RBI was making its intentions clear through measures aimed at pushing the rupee higher, but questioned whether the steps would ultimately achieve the desired outcome.
The official said the RBI could change near-term market dynamics, but the measures might prove ineffective if the underlying pressures on the currency persisted.
-With Reuters inputs
