The RBI and SEBI decided to step in to halt the rupee’s slide by coming down on speculation in the currency.
A day after the unit hit a new life-time low of 61.19 against the dollar, the Securities and Exchange Board of India on Tuesday decided to restricting speculative trading in the currency. .
The Reserve Bank of India barred banks from taking proprietary positions in currency derivatives.
Buoyed by these moves, the rupee recovered to 60.14 on Tuesday, but remained under pressure.
SEBI said it was taking the action “in view of the recent turbulent phase of extreme volatility in the dollar-rupee exchange rate” and in consultation with the central bank.
It will “increase margin requirements for currency derivatives”, among other steps, making it costlier for traders to bet on the rupee's future value.
The rupee has been the worst performing Asian currency against the dollar in the last quarter as worries mount that the US Federal Reserve will reduce its economic stimulus programme that has prompted investments into emerging markets.
The Government is also struggling to find ways to close the country’s gaping current account deficit, the broadest measure of trade, which is seen as a major drag on the currency.
The current account deficit — which stems mainly from huge crude oil and gold imports and weak exports amid the global economic downturn — hit a record 4.8 per cent of gross domestic product in the last financial year.
SEBI said curbs on speculative trading have been initiated in the view of extreme volatility in dollar-rupee exchange rate. The exposure to all currency contracts for a broker has been capped at 15 per cent of his overall exposure or $50 million, whichever is lower. For clients, this cap would be 6 per cent, or $10 million, whichever is lower.
Changes from today
The current exposure limits for brokers and clients are the higher amounts of 15 per cent of their overall exposure or $50 million, and 6 per cent or $10 million, respectively. The changes would be effective from July 11.
Following SEBI’s move, the National Stock Exchange revised the position limits as well as margin requirements for exchange traded currency derivatives.
Currency derivative trading allows traders and investors to take forward views on various currency pairs, including rupee-dollar.
Our Mumbai bureau reports: In a bid to prop up the rupee, the RBI said any transaction by banks in currency futures/exchange traded currency options markets will have to be necessarily on behalf of their clients.
The RBI said its directive preventing banks from carrying out proprietary trading in currency derivatives comes into effect immediately and will be in force till further orders in view of the ‘evolving market conditions’.
According to Bitupan Majumdar, Head - Forex Derivatives, JRG Wealth Management, the rupee will continue to be under pressure as the country is facing a structural problem in the form of current account deficit.
Further, the Indian unit is depreciating as foreign investors are selling their investments in the country.