India props up rupee with oil dollar window, hedging curbs
The Reserve Bank of India said Saturday it will sell dollars directly to three state-run oil companies starting Monday, keeping their huge purchases out of the open market. It also tightened rules on currency hedging. The rupee is close to 97 per dollar, near a record low, and has lost more than 7% this year.
India's central bank on Saturday moved to shore up the falling rupee, saying it will sell dollars directly to three state-run oil companies and tighten the rules on how companies hedge against currency swings.
Starting Monday, the Reserve Bank of India will meet the full daily dollar needs of Indian Oil, Hindustan Petroleum and Bharat Petroleum through a special window, the bank said. That takes one of the largest sources of dollar demand out of the currency market. "It will show up in a depletion of reserves," Dhiraj Nim, a currency strategist at ANZ Bank in Mumbai, told Reuters. After the news, the rupee gained about 0.6% in offshore trading, Reuters reported.
The bank also cracked down on hedging: companies can no longer rebook a rupee currency contract once it has been canceled, though rolling over contracts at maturity is still allowed, The Hindu BusinessLine reported. The amount they can hedge without proving they have a real exposure was cut to $5 million from $100 million. Banks must also keep a cash reserve with the RBI equal to 20% of certain contracts larger than $2 million, which raises the cost of betting against the rupee.
The aim is to stop speculation, not normal business hedging, analysts said. V. Rama Chandra Reddy, treasury head at Karur Vysya Bank, told BusinessLine the steps may help "moderate excessive positioning" but will not necessarily strengthen the currency.
The rupee has been hit by high oil prices and rising global bond yields. It closed near 96.73 per dollar on Oct. 9, close to a record low, The Indian Express reported. India's foreign exchange reserves fell by $12.95 billion to $734.60 billion in the week to Oct. 2. The bank raised its key interest rate by a quarter point to 5.50% on Oct. 7, and one-off steps to draw deposits and loans from abroad have brought in more than $140 billion, Reuters reported. The rupee has kept sliding anyway.
For Indian families, a weak rupee makes imported fuel and goods more expensive. Retail inflation is forecast to reach 5.2% this fiscal year, the Express reported.
What we know: The RBI will supply dollars to three state oil firms from Monday and has tightened hedging rules to cool demand for dollars.
What we don't: How much of India's reserves the window will use, and whether the rupee will weaken past 97 per dollar.
Where outlets agree Reuters and The Hindu BusinessLine both report the RBI will supply dollars to three state oil firms and cut a key hedging limit to $5 million from $100 million.
Where they differ The outlets cited here report the same key facts so far.