The Reserve Bank of India’s new measures are aimed at slowing a surge in corporate hedging against further rupee weakness, with banks to be asked to hold reserves against large hedges and the common practice of cancelling and rebooking rupee-linked derivative contracts set to be restricted.

The scale of hedging shows why the RBI acted. Corporate purchases of forward dollars rose to a record 77 billion dollars in September, up 80 per cent from a year earlier, while sales were far smaller at 41 billion dollars, adding to the pressure on the currency. The rupee, down nearly 7 per cent this year, came close to its record low of just under 97 last week.

Higher hedging costs ahead

Six bankers said the measures could raise hedging costs by 80 to 150 basis points, depending on how much banks pass on to clients, and are designed to make speculative positioning harder. Authorised dealers must now obtain written undertakings from clients confirming that the same underlying exposure has not been hedged with any other authorised dealer.

For all rupee-linked forex derivative contracts with a notional value above 2 million dollars, authorised dealer banks must maintain a cash reserve with the RBI equal to 20 per cent of the rupee equivalent of the notional amount. The measure is intended to act as a liquidity buffer against large speculative positions in the currency market.

A weekend scramble

The curbs caught markets off guard, with bankers working through the weekend to put systems in place for Monday’s open. Analysts are expected to assess whether the 20 per cent reserve requirement will raise hedging costs for large corporates, potentially influencing import and export pricing decisions in the months ahead.

The other pillar of the package

Alongside the hedging curbs, the central bank has opened a special window allowing oil marketing companies to buy dollars directly from it, targeting one of the largest sources of daily dollar demand. India imports most of its crude, so the surge in oil prices tied to the Middle East conflict has fed directly into its import bill, making the oil companies’ dollar purchases a key pressure point for the rupee.