RBI curbs to arrest Re slide

MUMBAI, JAN 6: In yet another measure aimed at stabilising the rupee, the Reserve Bank of India (RBI) today directed all banks to square up ...

MUMBAI, JAN 6: In yet another measure aimed at stabilising the rupee, the Reserve Bank of India (RBI) today directed all banks to square up their inter-bank position at the end of the day’s trading. This measure effectively means that the RBI is imposing a overnight limit on banks and preventing them from going either long or short in dollars.

The immediate provocation of the new Reserve Bank measure was the sudden fall of the Indian rupee which came under renewed pressure on Tuesday, unsettled by rising dollar demand from industry and the impact of wilting southeast Asian currencies. Simultaneously, the Reserve Bank pumped in about $ 200 million through intervention in the spot and the forward markets to stem the fall of the rupee. As a result, the rupee which lost 20 paise to touch the intra-day low of Rs 39.64 against the dollar (after opening at Rs 39.42) later recovered to close at Rs 39.38/41.

According to an RBI circular, till further notice authorised dealers should maintain a square or near square position at the end of each day. Presently, banks are allowed to determine their own limits based on capital adequacy, balance sheet size and asset base. The RBI has however clarified that the near sqaure positions is intended only to cater to pipeline transactions, vostro funding transactions after banking hours in India and non marketable amounts.

Describing the latest measure as a "weak-kneed reaction", treasurers in foreign banks said that this will hamper trading and the forex markets will lose depth. While admitting that they had gone long on dollars during the last few months which had led to certain amount of speculation, the dealers said that they had always stayed within the overnight limits. The Reserve Bank had removed the bankwise limits in slack season credit policy in 1996.With the spot rupee flaring up on Tuesday, the forwards also went up and the six-month forwards (annualised) touched a high of 8 per cent. The Reserve Bank conducted swaps for January over July and August to calm the forwards.

In the non delivery forward (NDF) market, the three month rupee touched 42 while in the domestic market it was trading at 40 leading to an arbitrage opportunity The six-month and one-year NDF were trading at 43 and 44 but the attention was in the three-month NDF as the arbitrage opportunity was the maximum there.

Dealers said a major reason behind the rise in dollar demand appeared to be a revival in industrial activity. Another reason for the spurt in dollar demand was the travel requirement of Haj pilgrims who go to Moslem’s holiest city of Mecca in Saudi Arabia. It may be recalled that the rupee hit an historic low of 39.90 to the dollar on December 2, 1997, prompting the central bank to launch a rescue package. The RBI tightened domestic liquidity and hiked export credit in late 1997 with a view to prevent spillover of rupees.