DBS Group Research economist Radhika Rao notes that the Reserve Bank of India (RBI) has partially rolled back recent FX curbs that were introduced to stem one-sided Indian Rupee (INR) depreciation. The changes restore some related-party and Non-Deliverable Forward (NDF) hedging flexibility while keeping net open position caps. Rao highlights that the Rupee has recovered from record lows but still underperforms year-to-date, and further administrative tools from 2013 remain available.

RBI relaxes FX measures, Rupee still lagging

"The RBI partly rolled back FX curbs imposed earlier in the month, which were intended to arrest one-sided depreciation in the rupee, but had caused liquidity and positioning disruptions in onshore as well as offshore trades."

"According to an official circular on Monday, the central bank will permit transactions in the related-party deals, which include cancellation and rollover of existing contracts, as well as undertake back-to-back hedging in the NDF market to offset the risk from FX contracts."

"The nominal ceiling on net open positions in the local deliverable market will remain in place, along with restrictions preventing banks from engaging in the full range of FX derivative transactions with related parties."

"Since these administrative measures were introduced last month, the rupee has strengthened by nearly 2% against the dollar, recovering from record lows of around 95 per USD last month."

"Overall, the decision to ease some of the measures appear to be aimed at striking a balance between supporting genuine hedging needs while curbing arbitrage/speculative activity in the currency market."

"Despite recent gains, rupee has underperformed on ytd basis, more than regional peers.  Besides the special oil dollar window, other notable options from the 2013 playbook include – gold import curbs, concessions for debt investors, special non-resident deposit facility and as a last resort, policy tightening to improve returns to attract rate sensitive flows, etc."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)