Norms for speculative trading in rupee tightened

Norms for speculative trading in rupee tightened

Massive intervention by the Reserve Bank of India (RBI) and capital market regulator Securities and Exchange Board of India (Sebi) to tighten norms on speculative trading on Tuesday helped the rupee close higher at 60.14 against the US dollar. The rupee had hit a life-time low of 61.21 on Monday.

On Tuesday, the rupee rallied after banking and market regulators clamped curbs on speculative trading in currency derivatives, even as regulatory measures are expected to provide only brief respite to the currency. The dollar-rupee pair made a high of 60.46 and low of 59.71, before closing at 60.15.

In a notification issued late on Monday, the RBI had banned banks from proprietary trading in domestic currency futures and options, while the Sebi doubled the margin requirement on domestic dollar-rupee forward trade.

The RBI has also asked Indian Oil, Bharat Petroleum, Hindustan Petroleum and Mangalore Refinery to source all of their 8-8.5 billion of dollar requirement every month for import of oil, from a single public sector bank.

As per current practice of discovering better rates, oil firms seek quotes from several banks for their dollar needs, which adds to speculation demand for the dollar.

It is expected that the latest regulatory moves will curb speculative trading and pare short positions in the rupee, after some bankers said they had been discreetly asked last month by the RBI to trim intra-day open positions.

In a circular on Tuesday, the Sebi increased margin requirements on dollar-rupee forward trade to 100 per cent of the traded amount, which means investors will have to shore up the full amount of the transaction at the time of trade itself and not during settlement. It also imposed fresh restrictions on open interest on dollar-rupee trading.

The rupee has depreciated by over 12 per cent since April-end, leading to imports of oil and other commodities becoming costlier and having a negative impact on the current account and fiscal deficits.

However, forex traders maintained that the rupee is expected to remain vulnerable unless regulators can take stronger measures.

"There will be some impact on the rupee, but not likely to be massive as this does not change the structural weakness of India’s external balances," said Nizam Idris, head strategist for currency and fixed income at Macquarie Group.Analysts said the RBI may resort to other administrative steps in the near term, like a special window to provide dollars to oil companies, the biggest buyers of greenbacks in domestic markets.

The government may also revise limits upwards in sectors like defence or issue a sovereign bond to non-resident Indians to attract foreign direct investment.

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