In a bid to augment dollar supply at a time when the rupee has weakened substantially, the Reserve Bank of India on Wednesday lifted the $100-million cap placed on banks' net foreign exchange supply position in the market.
Besides encouraging companies to hedge their foreign exchange exposure, the removal of the $100- million cap on the net short dollar position of banks could persuade companies to convert their rupee liabilities into dollar liabilities to take advantage of the interest rate differentials.
This move could push up dollar supply in the market and stem the depreciation of the rupee, say market experts.
The rupee has weakened by almost 16 per cent in the financial year so far to 52.69 a dollar. The rupee has been Asia's worst performing currency.
In its circular relating to foreign currency-rupee swaps, the RBI said on a review, it has been decided to remove the limit of $100 million placed on swap transactions undertaken by banks as intermediaries by matching the requirements of corporate counterparties.
“The RBI has lifted the cap of $100 million net supply position to enable companies to increase their ‘short dollar' positions. The merit of this move will not be known now… However, the pipeline measures should address the dollar liquidity squeeze and supply side issues.
“The immediate concern for RBI would be to arrest the spread of currency woes into money market,” said Mr Moses Harding, Head (ALCO & Economic Research), IndusInd Bank.
Mr Harding emphasised that to tackle the rupee's weakness it is essential to deregulate the foreign currency non-resident/ non-resident external deposit rates and lift the ‘cap' on off-shore borrowing limits for banks. These can provide instant results with low lag time. It can definitely result in reducing the momentum to the fall.