MUMBAI: The RBI’s curbs on foreign exchange trading were aimed at checking speculative bets against the rupee after the central bank found that around one-third of derivative trades were being cancelled or closed on the day they were entered into, governor Sanjay Malhotra said.In an interview with Moneycontrol published on Tuesday, Malhotra said the RBI had acted because speculative activity was amplifying currency volatility instead of serving genuine hedging needs. “We observed excessive volatility and one-sided bets that were preventing market forces from determining the rupee’s true value,” he said.The RBI announced a series of measures on Oct 10 after the rupee came under sustained pressure, touching a record low of 96.96 against the dollar on Friday. The steps included supplying dollars directly to three state-run oil marketing companies, tightening rules for foreign exchange derivatives and introducing a Foreign Exchange Risk Reserve requirement for banks on qualifying transactions.Malhotra said genuine hedging typically involved maintaining a position for the duration of the underlying exposure. “If a participant has a genuine underlying requirement, such as an import payment, they will typically maintain the hedge for the reasonable duration of that exposure,” he said. The high rate of same-day cancellations and rebooking indicated “a significant speculative element in the forex derivatives market”.The RBI does not seek to defend a particular exchange rate but wants to ensure that market forces determine the rupee’s value without excessive volatility. “We have repeatedly said that we do not target any particular price level or band for the rupee,” Malhotra said. “Our effort has always been to ensure orderly movement in the currency and prevent excessive speculation.”The central bank’s concern is that one-sided positioning can distort price discovery, making currency movements less reflective of underlying demand and supply. Its measures seek to curb speculative activity while allowing the exchange rate to be determined by market forces.
