INR jumps 130 paise to 93.59 after RBI curbs speculation
What's the story
The Indian rupee opened 130 paise higher against the US dollar today, following a recent directive from the Reserve Bank of India (RBI). The local currency was trading at 93.59 to the dollar, up 1.3% from its record low of 94.85 on March 27. The RBI's move is aimed at curbing speculative activity and stabilizing the currency, which has been under pressure due to outflows and oil price concerns.
Regulatory measures
RBI sets $100 million onshore cap
On the same day, the RBI directed all banks to limit their net open position on the rupee in the onshore deliverable market to within $100 million. Banks have been given time until April 10 to comply with this directive. This move is expected to lead banks into unwinding arbitrage trades, with positions being squared off by the deadline.
Market response
Banks likely to sell dollars domestically
The RBI's directive is likely to push banks into selling dollars in the domestic foreign exchange market. This is expected amid the unwinding of existing arbitrage positions, which are estimated to be around $40 million for all banks. However, as the rupee strengthens, importers and oil companies may buy dollars to hedge their positions against rising Brent crude oil prices.
Financial implications
Traders warn banks face major losses
Traders have warned that banks could face major losses as they unwind positions at much wider spreads than where they were initiated. Brent crude oil futures rose 3% on Monday to nearly $116 per barrel amid fears of a prolonged conflict in West Asia. The rupee has been under heavy pressure due to persistent portfolio outflows and concerns over the impact of higher oil prices on India's economic outlook.