RBI Eases Rupee Derivative Curbs to Revive Market Activity After Volatility

The central bank had introduced a series of curbs on April 1 to contain heightened volatility in the rupee, which had slipped to record lows past the 95 mark in late March.

These measures included barring banks from offering non-deliverable forwards (NDFs) to clients and restricting the rebooking of cancelled forward contracts, aimed at curbing arbitrage trades that were adding pressure on the currency.

In its latest move, the RBI has withdrawn both these restrictions entirely. It has also eased rules related to foreign exchange derivative contracts involving related parties, allowing the cancellation and rollover of existing contracts and permitting transactions with non-resident entities on a back-to-back basis.

The relaxation marks a calibrated rollback of crisis-era controls, even as the central bank continues to keep a close watch on speculative activity.

The cap on banks' net open rupee positions in the onshore market at $100 million remains unchanged.

The earlier set of restrictions had targeted arbitrage-driven volatility by limiting banks' positions.

However, the measures proved less effective than expected, as banks reportedly shifted positions to corporates and related entities, diluting the intended impact.

"On a review, it has now been decided to withdraw the instructions issued vide A.P. (DIR Series) Circular No. 03 dated April 01," the central bank said.

"Further, it has been decided that authorised dealers shall not undertake any foreign exchange derivative contract involving INR with their related parties except for the following: cancellation and rollover of existing contracts and transactions undertaken with non-related non-resident users on a back-to-back basis in terms of the Master Direction - Risk Management and Inter-Bank Dealings dated July 05, 2016, as amended from time to time," it added.

A second round of curbs introduced in April helped the rupee recover nearly 2 per cent, after which it has traded in a relatively stable range of 92.50 to 93.50 in recent sessions.

Market participants see the latest rollback as an attempt by the central bank to strike a balance between restoring normal hedging activity and preventing excessive speculative trades that could destabilise the currency.

The move also follows increased scrutiny of corporate and related-party transactions amid concerns that some deals were being used to bypass regulatory safeguards.

- IANS