The Reserve Bank of India on Thursday announced a slew of measures to support the rupee and curb build up of speculative positions in the foreign exchange market.
The measures include withdrawal of the facility to cancel and rebook forward contracts by resident and foreign institutional investors with immediate effect.
A forward contract is a binding bilateral agreement either to buy or to sell a certain amount of a foreign currency at a predetermined price at a specified time in the future.
Though this contract locks in the dollar price to protect a resident or FII against changes in the exchange rate, market players say the facility is being misused to take speculative bets against the rupee.
The RBI's announcement comes at a time when industry bodies are clamouring for its decisive intervention in the forex market to stem the rupee's continuous slide.
The rupee closed a tad stronger at 53.66 per dollar on the back of RBI's intervention on Thursday against the previous close of 53.71. During the course of the day's trading it touched an all-time low of 54.2925.
Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked, according to the RBI circular.
Further, forward contracts booked by the FIIs (for hedging currency risk on the market value of their entire investment in equity and/ or debt), once cancelled cannot be rebooked. The forward contracts may, however, be rolled over on or before maturity.
“The measures that have been announced suggest that the RBI is trying out measures other than intervention to curb speculation in the forex market,” said Mr Ramesh Krishnan, Head – Treasury, Dhanlaxmi Bank.
The rupee could find support from the latest RBI measures and could trade in the 52.80-53.25 band on Friday, he added.
Reduction open positions
To prevent speculation by banks in the forex market, the RBI said the net overnight open position limit of banks authorised to deal in foreign exchange will be reduced across the board. Revised limits will be intimated to individual banks, the circular said.
Intra-day open position/daylight limit for banks should not exceed the existing open position limits approved by the RBI.
All forex transactions in the market (cash/ tom/ spot) by the banks on behalf of clients can be undertaken for actual remittances/ delivery only and cannot be cancelled or cash settled.
Importers limits
For importers utilising the past performance facility to hedge currency risks, the facility has been reduced to 25 per cent (from 75 per cent) of the previous three financial years' actual import/export turnover or the previous year's actual import/export turnover, whichever is higher.
All forward contracts booked under this facility by both exporters and importers henceforth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, cannot be passed on to the customer.