RBI's rupee defence: Special dollar window for oil firms, tighter forex derivative rules

The Reserve Bank of India (RBI) has announced a series of measures to ease pressure on the rupee, including a special dollar window for three state-run oil marketing companies (OMCs), tighter rules for foreign exchange derivatives and a cash reserve requirement for certain large transactions.

The measures come as the rupee remains close to its record low against the US dollar despite the central bank's interventions in the foreign exchange market and an increase in interest rates. The rupee closed at Rs 96.73 per dollar on Friday, near its all-time low of Rs 96.96 touched in May.

Here are the key measures announced by the RBI and how they could support the domestic currency.

1. Special dollar window for oil companies

From October 12, the RBI will meet the entire daily dollar requirements of Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) through a special facility.

Oil companies are major buyers of dollars because India imports a substantial portion of its crude oil requirements. Their demand for foreign currency can put pressure on the rupee, particularly when global oil prices rise.

MUST READ: RBI opens special dollar window for three state-run oil companies from October 12

Under the special arrangement, the RBI will supply dollars directly from its foreign exchange reserves, removing the three companies' daily dollar demand from the spot foreign exchange market.

This could reduce immediate demand for dollars, helping ease volatility and pressure on the rupee. However, the arrangement could also lead to a depletion of foreign exchange reserves as the central bank supplies dollars to the companies.

2. Restrictions on rebooking cancelled forex contracts

The RBI has directed authorised dealers not to allow users to rebook foreign exchange derivative contracts involving the rupee if the original contracts were cancelled after the directions were issued.

The restriction applies to both deliverable and non-deliverable contracts. Rollovers of contracts at maturity will continue to be permitted, subject to existing regulations.

The measure is aimed at curbing repeated cancellation and rebooking of contracts, which can contribute to speculative activity and volatility in the currency market.

3. Lower limits for forex derivative positions

The central bank has reduced the threshold for undertaking certain foreign exchange derivative transactions without establishing the underlying exposure from $100 million to $5 million equivalent.

The revised limit also applies to positions in exchange-traded currency derivatives involving the rupee, across recognised stock exchanges.

The move is intended to ensure that large derivative positions are backed by genuine underlying exposures, such as import payments or export receivables, rather than being used primarily for speculative purposes.

ALSO READ: Rupee under pressure: SBI Research wants RBI to prioritise currency stability alongside inflation

4. New 20% foreign exchange risk reserve

The RBI has introduced a Foreign Exchange Risk Reserve (FERR) requirement for eligible rupee-involving forex derivative contracts exceeding $2 million in notional value.

Authorised dealers will have to maintain a cash reserve with the RBI equivalent to 20% of the rupee value of each eligible transaction. The requirement applies to specified contracts used to hedge current account exposures where the user purchases foreign currency against the rupee.

The additional reserve requirement raises the cost of eligible transactions and is intended to strengthen risk management and discourage excessive positions.

5. Tighter documentation for hedging

Authorised dealers must obtain and retain an undertaking from users entering into specified forex derivative contracts, confirming that the same underlying exposure has not been hedged through another authorised dealer.

This requirement seeks to prevent duplicate hedging of the same exposure and improve transparency in the market.

DO READ: Rupee hedging costs surge: Why Indian stocks and bonds look less attractive to foreigners

Will these measures strengthen the rupee?

The measures could reduce speculative demand for dollars and ease short-term volatility. However, their effectiveness will depend on broader factors, including crude oil prices, foreign portfolio investment flows and global dollar movements.

India's foreign exchange reserves fell by $12.95 billion to $734.60 billion in the week ended October 2, marking the fourth consecutive weekly decline. The reserves were around $51 billion below their record high of $785.70 billion reached in September.

While the special dollar window could ease immediate market pressure, sustained stability in the rupee will depend on the balance between dollar demand and supply and the broader external economic environment.

READ ONCE: BT BIG STORY: Why forex reserves fell $50 bn in a month despite record FCNR(B) inflows