At the same time, the RBI moved towards normalising the foreign exchange market by asking oil marketing companies to source all their dollar requirements from the market, starting last week. Going forward, the OMCs have been advised to smoothen their daily dollar demand, so that the upcoming bunched-up demand on any particular day is covered in advance in the forward forex market or covered on days with low demand, said the central bank in a press release.
Importantly, while the RBI closed the special swap window opened for OMCs on August 28, it added that dollars could be provided to OMCs directly on rare days when there is a spurt in dollar demand.
The rupee, which traded at an intra-day high of 61.97/$, slipped marginally to close at 62.32/$ on Monday as markets priced in the possibility of higher demand for dollars from OMCs.
The rupee has gained more than 10% from its all-time low of 68.85/$ touched in August as the RBI's decision to supply dollars directly to OMCs effectively took away demand worth $300-400 million on a daily basis.
Much of the movement in the currency is driven by the NDF market. I don't think any NDF player, after the CAD data, can now make a case for a run on the rupee like we saw earlier. Having said that, we are still exposed to the ebb and flow of capital and global risk temperament, said Abheek Barua, chief economist at HDFC Bank.
Incidentally, the RBI unexpectedly released the July-September current account deficit data after markets closed on Monday, which showed a sharp fall in the CAD to 1.2% of GDP in the second quarter of the fiscal.
The currency markets took comfort from the strong inflows through the special swap windows that enabled banks to bring in dollars through foreign currency non-resident (FCNR) deposits and overseas borrowings till November 30 at a discounted swap cost.
Economists said that more than 70%, or around $24 billion, of the $34 billion that came in through the swap windows would have been through FCNR deposits. Banks had aggressively marketed the product, specially to high net-worth individuals, by offering them leverage in order to take advantage of the FCNR facility.
The mop-up via the RBI's FCNR and overseas borrowings swap schemes is the largest since liberalisation. The previous three attempts in 1991, 1998 and 2001 had garnered not more than $5 billion each.
We are arriving at normalcy now. The comfort on the external sector is better positioned not just in terms of the current account deficit but also the financing, said Shubhada Rao, chief economist at YES Bank.
Dealers said that with the swap windows now wound down, the currency would be largely dependent on the US Federal Reserve's decision to taper its quantitative easing programme.
The rupee will now move according to flows. But there is unlikely to be a big depreciation as December is usually a quite month, said a dealer with a foreign bank. Rao of YES Bank said portfolio outflows can be anticipated but they may not be large enough to cause a significant dent in the currency. YES Bank forecasts the rupee to appreciate around 60/$ by March. Since April, FIIs have pulled out a net $3.8 billion from domestic debt and equity markets, with heavy FII selling in debt outstripping the strong foreign inflows into the equity markets.
While the FCNR swap facility has ended, the RBI has extended the deregulation of interest rates offered on non-resident rupee accounts (NRE) until January end. Therefore, banks will be able to offer customers higher interest rates on NRE deposits compared with domestic rupee deposits.