The Indian rupee surged about 1% on Monday after the central bank diverted oil companies’ dollar purchases. The currency opened at 95.76 to the dollar. Citi economists said, "The package raises the near-term cost of rupee depreciation trades; it does not remove the underlying balance of payments pressures."
MUMBAI, Oct 12 (Reuters) - The Indian rupee surged about 1% on Monday after the central bank diverted oil companies’ dollar purchases from the spot market and moved to restrain corporate demand for forward dollars.
The rupee opened at 95.76 to the dollar, having settled at 96.73 on Friday. The currency was a standout performer in Asia’s foreign-exchange markets, with most regional peers trading in a narrow range.
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Despite the rally, the rupee is still down 6.6% this year.
Citi economists said that recent measures by the central bank could lead to some knee-jerk appreciation in the unit followed by consolidation.
"The package raises the near-term cost of rupee depreciation trades; it does not remove the underlying balance of payments pressures," they said in a Monday note.
The Reserve Bank of India on Saturday unveiled a series of measures aimed at addressing two key sources of pressure on the rupee: persistent dollar demand from oil marketing companies, which has been amplified by high crude prices, and demand from corporates seeking to hedge against further currency weakness.
Expectations of persistent weakness encouraged importers to step up purchases of forward dollars to record levels last month to protect against higher future costs.
That hedging demand, in turn, added strain on the currency, creating a cycle of depreciation expectations, increased hedging and further weakness in the rupee.
RBI STEPS UP
The RBI barred firms from rebooking cancelled rupee-linked derivatives, slashed the threshold for transactions without underlying exposure and mandated that banks set aside 20% cash against certain FX contracts, potentially raising the cost of hedging against rupee weakness.
The reserve requirements do not apply to all FX transactions, but only current account transactions, bankers said. They also do not cover companies hedging external commercial borrowings or foreign portfolio investors hedging their investments in India.
The reserve requirements could increase hedging costs for importers by 80-150 basis points, depending on how much of the additional cost lenders pass on to clients, bankers said.
RALLY FACES A TEST
While the rupee has rallied sharply in the aftermath of the RBI's measures, the sustainability of the recovery will depend on whether underlying pressures subside, analysts say.
"Unless BoP pressures ease more broadly, gradual INR depreciation is likely to resume once their initial impact fades," analysts at ANZ said.
The firm has retained its medium-term INR depreciation view and said it will reassess levels after reviewing hedging and FX reserve data in the coming weeks.
India's FX reserves declined to $734 billion as of October 2 after hitting a record high of $785 billion in September.
The FX pile had been bolstered by over $140 billion in inflows garnered under policy measures to draw capital from overseas Indians and via offshore borrowings by banks and state-run firms.