India intervenes to save rupee from free fall

Currency has lost 12% since April.

The Reserve Bank of India and the Securities and Exchange Board of India, the securities market regulator, have imposed broad measures to stanch the rupee’s continuing loss of value.

The restrictions come into effect immediately and are expected to help prevent volatility in the rupee. The local currency sank to an all-time low of 61.21 to the US dollar on July 8 but recovered to 60.14 on July 9 following government intervention.

The measures imposed by the government include requiring oil companies, the largest domestic buyers of dollars, to buy dollars from a single state-owned bank. RBI said this will ease pressure on oil firms that have a monthly dollar requirement of over US$8 billion.

The central bank also forbids banks from trading on their own in rupee currency futures and options, except on behalf of their clients. This measure is expected to help prevent further rupee volatility.

“On a review of the evolving market conditions, it has been decided that banks should not carry out any proprietary trading in the currency futures and exchange traded currency options markets,” RBI said.

On the other hand, SEBI has tightened exposure norms for currency derivatives to curb speculation that has eroded the rupee’s value. The margin requirement has been doubled for rupee-dollar forward trade.

These measures make it costlier for banks and dealers to take positions in the market expecting a further drop in the rupee’s value. It also groups large buyers of dollars to a single window to cool the forex market.