The one-month non-deliverable dollar/rupee forward that had forecast the rupee to fall to 69 per dollar a day before Rajan took over now predicts a fall to just about 67 by the end of September.
The three-month contract too forecasts a more modest fall to 68.50 from the level of 70 predicted earlier.
I think whatever he said yesterday, one has to agree with everything. And then, once policymakers inspire confidence on the current account side and the fiscal side, everything else will follow, said Hitendra Dave, head of global markets at HSBC.
On Wednesday, Rajan announced special swap windows through which banks can minimise their currency risk arising out of foreign currency deposits and capital raised abroad. This would enthuse banks to attract more foreign currency deposits. Analysts expect close to $10 billion of flows from the FCNR deposits owing to the swap facility.
In response, the rupee strengthened 1.48% to 66.11/$ on Thursday in the onshore spot market and onshore forwards indicate the rupee could hold at levels close to 67.51/$ over the next three months.
More significantly, Rajan said the RBI would gradually liberalise financial markets and make the rupee more freely convertible. While the new governor didnt detail a specific plan, the central bank eased and clarified restrictions placed on resident remittances and overseas investments by corporates on Wednesday, even before the new governor was sworn in.
Rajan, in his first press meet as governor, said that it is better that investors take positions domestically and provide depth and profits to our economy than they take our markets to foreign shores, indicating that the central bank wants to nip the influence of offshore markets like the NDF.
Dealers believe that once infrastructure and processes such as extended trading hours for foreign currency market and allowing FIIs to hedge in the onshore derivatives market are in place, the influence of the NDF could slowly wear off. The NDF markets size is estimated to be nearly 2-3 times that of the onshore derivatives market.
However, Rajans measures may not be able to completely turn the tide for the rupee. The currency is still expected to weaken further, weighed down by the fears of slower capital inflows which, in turn, could make it difficult for the country to fund its current account deficit.
A key factor that could override the impact of RBIs measures remains the outcome of the US Federal Reserves policy meet where the Fed is expected to indicate its plan to start tapering its quantitative easing programme.
A lot of the players sitting outside are looking at India as a part of a basket of currencies and how the US taper would impact. Now, those sentiments cannot get impacted by just the RBI measures, said the head of fixed income at a foreign bank.
Currency market players who get to punt on both onshore and offshore markets said that Rajans measures may bring temporary relief and the event that would set the rupees path would be the US Federal Reserves statement later this month.
What matters is what Bernanke does later this month. And we still have a huge current account deficit to fund. Rajans measures have not made that disappear, said a currency dealer based in Singapore.