Reserve Bank and SEBI step in, apply brakes on Indian rupee free-fall

Written by ENS Economic Bureau | New Delhi | Updated: Jul 10 2013, 15:07pm hrs
The Reserve Bank of India and market regulator SEBI stepped in with a wide set of measures Tuesday to stop the rupee from sliding beyond the 12 per cent it has fallen since the end of April. Exclusive: Offshore market determines Rupee's value

The measures make it costlier for banks and dealers to take positions in the market expecting a further dip in the rupee and groups large buyers of dollars to a single window to keep the rest of the forex market cool.

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Oil companies, which are the largest domestic buyers of dollars to finance their imports, have been asked to trade only with a single bank. Since oil companies typically club their needs, it creates a huge visible demand for dollars in the forex market and puts pressure on the exchange value of the rupee.

Earlier on Tuesday, the RBI also barred banks from trading in rupee currency futures and options, except on behalf of their clients. 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, a RBI statement said.

The restrictions came into effect immediately and are expected to help prevent volatility in the domestic currency. The rupee had depreciated to a life-time low of 61.21 to the US dollar Monday and ended at 60.14 Tuesday on the back of the announcements.

Market regulator SEBI too has tightened the exposure norms for currency derivatives to check speculative activity in the market. After discussions with the RBI Monday, the margin requirement has been doubled for rupeedollar forward trade.

The steep fall of the rupee could also affect the governments disinvestment plans with major stake sales and the launch of the exchange-traded fund of public sector firms likely to be pushed back later into the year. Investors are wary and we need to watch the situation, said a senior official.

Meanwhile, Finance Minister P Chidambaram is trying to drum up foreign investment during his visit to the US this week and Prime Minister Manmohan Singh has called a meeting of industry leaders on July 29 to discuss measures, including steps linked to the rupee, to boost investor sentiment and help the domestic currency.

Measures and Impact

* RBI asks oil companies to buy dollars from single state-owned bank: Will ease pressure on oil firms that have a monthly dollar requirement of over $ 8 billion

* RBI bars banks from trading on their own in rupee currency F&O: Expected to help prevent rupee volatility

* SEBI tightens exposure norms for currency derivatives: Will help curb speculation that has eroded rupee value