India’s rupee surged the most in 19 months, extending its rebound from an all-time low reached yesterday, after the central bank announced measures to curb speculation in the foreign-exchange market.
The currency, this year’s worst performer in the region, strengthened the most among Asian currencies after the Reserve Bank of India said companies can’t enter into multiple forward contracts to cover a single overseas transaction. It pared gains as the monetary authority, which has raised interest rates 13 times since the start of 2010 to cool inflation, kept them unchanged at a policy review in Mumbai today.
“The RBI has taken decisive measures to reduce onshore speculation against the rupee,” said Olivier Desbarres, head of foreign-exchange strategy for the region at Barclays Capital in Singapore. “These measures have certainly caught the market’s attention and it reduces the chances of a rapid weakening of the rupee.”
The rupee jumped 1.7 percent to 52.7450 per dollar in Mumbai, the biggest gain since May 2010, according to data compiled by Bloomberg. It rose as much as 2.7 percent earlier. The currency, which fell to an all-time low of 54.3050 yesterday, has lost 1.3 percent this week and 15.2 percent in 2011.
The new rule applies to domestic as well as foreign investors and takes effect immediately, according to a central bank statement published after the market closed yesterday. Forwards are agreements to buy or sell assets at a set price and date. The RBI also said it will reduce the amount of open positions dealers can maintain overnight.
The Reserve Bank’s 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.
“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 $353 million this year after adding $29 billion in 2010, exchange data show. 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.
‘Line in the Sand’
“The step is likely to stem the fall in the rupee but is unlikely to put on an appreciating bias,” Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai, wrote in a report published today. “The aim is to reduce speculative positions and demand for dollars.”
The Reserve Bank may not boost the rupee beyond 52 because “it understands fundamentals are working against currency appreciation” in India now, Barclays Capital’s Desbarres said.
The curbs on forwards trading are in addition to steps taken by the central bank last month to boost the supply of dollars in the local market. The Reserve Bank eased rules in November for companies to borrow abroad and sell foreign currencies through swaps and raised the interest rate on bank deposits for Indians living overseas.
A further decline in the rupee threatens to stoke inflation that has stayed above 9 percent for 12 months. Every 1 percent depreciation in the currency boosts the rate of gains in wholesale prices by 6 to 10 basis points, according to Goldman Sachs Group Inc. A basis point is 0.01 percentage point.
The central bank’s latest measures show “the commitment of the RBI to fight further rupee depreciation,” said Sebastien Barbe, chief emerging-market strategist in Paris at Credit Agricole CIB. “I think this draws a line in the sand at close to 54 per dollar.”