Commerzbank’s Dr. Henry Hao and Charlie Lay note that the Reserve Bank of India (RBI) has unveiled a broad package of tools to stabilise the Indian Rupee (INR), including a special Dollar facility for oil importers, tighter FX derivatives rules, and higher reserve requirements. They argue these steps should curb Dollar demand, tighten INR liquidity and help prevent a disorderly USD/INR spike after recent gains.

RBI widens toolkit to stabilise Rupee

“The Reserve Bank of India (RBI) unexpectedly announced several measures to support the INR, targeting dollar demand from oil importers, FX derivatives activity and elevated domestic liquidity.”

“To moderate dollar demand from oil imports in the open market, RBI opened a special USD facility for state-run oil marketing companies (OMCs) to meet their daily dollar requirements.”

“RBI also tightened rules on FX derivatives. It reduced the threshold for FX derivative transactions without a documented underlying asset to USD5mn from USD100mn and prohibited dealers from re-booking cancelled INR derivative transactions.”

“Additionally, RBI introduced the Foreign Exchange Risk Reserve (FERR), requiring 20% of the notional value of each FX derivative transaction above USD2mn to be held with the central bank.”

“The measures should raise the cost of FX hedging, curb dollar demand and drain INR liquidity, providing near-term support to the INR and putting downward pressure on forward premiums.”

“Overall, the latest measures should contain a disorderly sell-off in INR. We could see a pullback in USD/INR near term after climbing to the 97.60 area in the past few weeks.”