The Indian rupee’s one-month forwards rose by the most since September after regulators announced steps to curb speculation in the derivatives market.
The Reserve Bank of India barred banks from proprietary trading in currency futures and exchange-traded options, effective immediately, according to a statement on the central bank’s website after market hours yesterday. The Securities and Exchange Board of India said in a statement today it will raise margin requirements and curtail open positions from July 11.
One-month offshore rupee forwards advanced 1.6 percent, the most since June 28, to 60.31 per dollar as of 9:06 a.m. in Mumbai, according to data compiled by Bloomberg. That was the biggest increase since Sept. 21. The spot rate strengthened 0.9 percent to 60.0725.
“The administrative measures prompted a short-covering rally in the rupee, though if previous history is a guide, the impact will only be temporary,” Patrick Bennett, a Hong Kong-based strategist at Canadian Imperial Bank of Commerce, wrote in a research note today. “Further losses from here are likely, though we don’t expect the same regional underperformance as seen in the last months.”
Short-covering refers to purchases of currencies or securities that are used to close out bets on price declines. CIBC was the third-best rupee forecaster over the past four quarters in data compiled by Bloomberg.
The spot rate sank to an unprecedented 61.2125 yesterday before closing 0.6 percent weaker at 60.615, according to prices from local banks compiled by Bloomberg. It’s tumbled 10 percent in the past three months, the worst performance among Asia’s 11 most-traded currencies.
The RBI, concerned about the fastest growth in currency derivatives trading in more than three years, asked overseas funds on June 26 to prove they aren’t speculating on the exchange rate.
Turnover in futures and options involving the rupee climbed 47 percent to a daily average of 387.7 billion rupees ($6.4 billion) in June on the National Stock Exchange of India Ltd., the biggest jump since January 2010. The central bank has also enquired about foreign lenders’ open positions involving the rupee. Global investors can only use rupee futures and options to protect their holdings of Indian shares and debt.
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