The Reserve Bank of India (RBI) Governor Sanjay Malhotra on October 12 said markets appeared overly pessimistic about the rupee, reiterating his optimism about India’s medium- and long-term balance of payments position even as the central bank stepped up measures to support the currency.
“The exchange rate is primarily a function of demand and supply. Markets today appear to be overly pessimistic, and that is why I said their assessment could be irrational in the short run,” Malhotra said.
The rupee opened at 95.18 against the dollar on Tuesday from Monday’s close of 95.77, following the RBI’s latest measures to curb dollar demand and support the domestic currency. It later pared some gains to close at 95.28 per dollar.
Malhotra, however, said the central bank does not target a particular price level or band for the rupee, adding that market forces would ultimately determine its value.
“We have repeatedly said that we do not target any particular price level or band for the rupee,” he said.
“While being cautious, I would like to emphasise that I am optimistic about India’s medium- and long-term balance of payments (BoP) position. The RBI and the government are determined to ensure that India’s external sector remains resilient. We will take whatever measures are necessary to achieve this,” he added.
RBI steps in to support rupee
Indian central bank announced a series of measures on October 10 to ease pressure on the rupee, which had been hovering near its record low amid elevated crude oil prices, high global bond yields and persistent pressure on capital flows.
The central bank said it would open a special window to meet the entire daily dollar requirements of three state-run oil marketing companies — Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd — from October 12. The facility is intended to shift their dollar purchases away from the spot foreign exchange market.
The RBI also tightened rules governing foreign exchange derivatives to curb excessive speculative activity and bring greater discipline to the market.
It reduced the threshold for foreign exchange derivative transactions that can be undertaken without establishing an underlying exposure from $100 million to $5 million. The central bank also prohibited the rebooking of cancelled rupee derivative contracts and tightened documentation requirements for such transactions.
Further, the RBI introduced a Foreign Exchange Risk Reserve requirement under which banks must maintain a cash reserve equivalent to 20 percent of the rupee value of qualifying foreign exchange derivative transactions exceeding $2 million. The measures aim to discourage excessive positions and increase the cost of certain currency trades.
