India Tightens Rules on Trading in Currency Forwards After Rupees Plunges

India’s central bank curbed trading in rupee forwards, seeking to temper speculation after Asia’s worst-performing currency fell to a record low.

Forward contracts once canceled cannot be bought again, the Reserve Bank of India said in a statement on its website yesterday. The new rule applies to domestic as well as foreign investors and takes effect immediately. Forwards are agreements to buy or sell assets at a set price and date.

The rupee, which plunged 16.6 percent this year and dropped to a record low of 54.3050 a dollar yesterday, will open stronger than 53 today as the measures curb speculation, according to FirstRand Ltd. and HDFC Bank Ltd. The trading curbs precede the RBI’s policy review at noon, where Governor Duvvuri Subbarao is expected to keep borrowing costs unchanged, according to a Bloomberg News survey.

“Exporters were booking a forwards contract, canceling it and then rebooking at a better rate, which was contributing to the free fall” of the rupee, said J. Moses Harding, an executive vice president at IndusInd Bank Ltd. (IIB) in Mumbai. “The RBI had to think out of the box and it seems to have taken the final option of curtailing foreign-exchange operations.”

The central bank also said it will reduce the amount of open positions dealers can maintain overnight. Onshore forwards signal the rupee will drop almost 2 percent from the spot rate in three months, according to data compiled by Bloomberg, indicating derivative traders are betting on a decline past 54.55 a dollar.

The move will be positive for the rupee in the “short- term,” increasing transaction costs and showing the RBI is looking to curb currency-market speculation, according to Standard Chartered Bank Plc.

‘Root Causes’

“This, along with some intervention from the RBI, will buy time for the country to address medium-term issues such as the current-account deficit and capital outflows,” said Ananth Narayan G., head of South Asia currency and bonds trading at Standard Chartered in Mumbai. Those are the “root causes of the rupee’s weakness.”

Overseas funds cut holdings of Indian shares by $311 million this year after adding $29 billion in 2010, data from the market regulator, as Europe’s debt crisis slows growth in Asia’s third-largest economy.

The nation’s current-account shortfall, which was $14.2 billion in the three months ended June 30, may widen to 3.5 percent of gross domestic product in the year ending March, Commerce Secretary Rahul Khullar said this month.

“Though such measures place strictures on trading, and therefore are theoretically not ideal, it had to be done as the rupee’s fall below 54 would have been bad for the economy,” IndusInd’s Harding said.

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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