The Reserve Bank of India (RBI) has directly intervened in the market to stop the record decline of the Indian rupee against the US dollar. The rupee slipped to an all-time low of ₹96.78 per dollar (historic low), which the central bank tightened on the forex derivatives market to handle. The main objective of RBI is to prevent currency speculation in the foreign exchange market.

Continued foreign capital withdrawal, uncertainty in crude oil prices and a strengthening US dollar have deepened the pressure on the rupee. The rupee is expected to receive immediate support from the RBI due to its tightening in the derivatives segment and controlling dollar liquidity through banking channels. Financial market experts and traders are now keeping an eye on the impact of this RBI tightening and the position of forex reserves in the coming days.

RBI has changed the rules

The Reserve Bank of India (RBI) on Saturday took several steps to reduce pressure on the rupee. These include tightening rules for foreign currency derivatives, banning rebooking of canceled contracts and requiring cash reserves for large trades. The rupee is currently trading at 96.78 against the US dollar, close to the all-time low of 96.95 hit in May.

Under the new rules, registered dealers will not be allowed to re-book rupee-linked foreign currency derivative contracts (be they deliverable or non-deliverable) to users if the contracts are canceled with the registered dealer after issuing instructions. Under the existing rules, rollover of the contract on maturity will continue to be permitted.

RBI has reduced the limit for all registered dealers to undertake foreign currency derivative transactions to hedge contracted exposures without establishing equivalent underlying exposure from $100 million to $5 million. The relevant limit for taking positions in rupee-linked exchange-traded currency derivatives without establishing underlying exposure has also been reduced from $100 million to $5 million across all recognized stock exchanges combined, the bank said.

A cash reserve of 20 percent has been implemented

As part of its latest reforms, the central bank has imposed a foreign currency risk reserve (FERR) requirement for rupee-linked foreign currency derivative contracts with a notional value of more than $2 million. Under the move, registered dealers will have to maintain 20 percent of the rupee equivalent of the notional amount of each eligible transaction as cash reserve with the RBI.

The RBI said in its circular that this FERR will apply to rupee-linked foreign currency derivative contracts entered into to hedge current account exposures, where the user buys foreign currency in exchange for rupees.

Additional scrutiny on foreign currency hedging

RBI has also imposed a documentation requirement for users entering into rupee-linked foreign currency derivative contracts to hedge contractual exposures. Registered dealers must obtain and maintain an undertaking confirming that the same underlying exposure has not been hedged with another registered dealer. RBI said the measures are aimed at strengthening market discipline and ensuring proper risk management, as well as keeping the foreign exchange market orderly and transparent.

Apart from this, the RBI will meet the entire daily foreign exchange requirement of Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation from October 12, removing the dollar demand of these three state oil marketing companies from the foreign exchange market.

Big drop in forex reserves

India’s forex reserves fell by $12.95 billion to $734.60 billion in the week ended October 2, according to data released by the Reserve Bank of India on Friday. This is the fourth consecutive weekly decline. Foreign exchange assets fell by $10.66 billion to $604.74 billion, while gold reserves fell by $2.28 billion to $106.41 billion. The decline followed last week’s $18.34 billion decline, which saw foreign exchange reserves fall by nearly $51 billion from a record high of $785.70 billion in the week ended September 4. The decline comes at a time when the rupee is under pressure and is trading near its all-time low against the US dollar.