The Indian rupee is set for a sharp rebound on Monday after the Reserve Bank of India stepped up efforts to curb dollar demand, with offshore trading pointing to a gain of about 1 per cent from Friday’s close near 96.7 per dollar. The one-month dollar-rupee non-deliverable forward contract signalled the rupee could rally past 96 when onshore markets open in Mumbai.

Non-deliverable forwards are offshore contracts settled in dollars, allowing investors to trade the rupee outside India and often giving an early read on where the currency will open. The rupee closed at 96.73 per dollar on Friday, near its record low of 96.96 touched in May, and has depreciated nearly 8 per cent so far this calendar year.

The RBI’s package

The central bank on Saturday unveiled a set of measures described as its most aggressive support for the rupee since the 2013 currency crisis. From October 12, the RBI will meet the entire daily dollar requirements of three state-run oil marketing companies, Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum, through a special window, selling dollars from its reserves through designated banks. That removes one of the largest sources of dollar demand from the spot market.

The RBI also tightened the rules on currency derivatives. Authorised dealers cannot allow users to rebook rupee forex derivative contracts if the originals were cancelled after the directions were issued, though rollovers at maturity are still allowed. The threshold for certain forex derivative transactions without an established underlying exposure falls from 100 million dollars to 5 million dollars equivalent, with the same limit applying to rupee positions in exchange-traded currency derivatives.

In addition, for eligible rupee forex derivative contracts above 2 million dollars notional, authorised dealers must hold a cash reserve with the RBI equal to 20 per cent of the rupee value of each transaction, and users must give an undertaking that the same exposure has not been hedged through another authorised dealer.

Market expectations

The RBI’s new measures to supply dollars directly to state-run oil companies and curb speculative currency trades are expected to lift the rupee in the near term, with Emkay Global Financial Services estimating the rupee could trade 1 per cent higher on Monday. Experts caution, however, that high oil prices, capital outflows and weak external balances will continue to weigh on the currency, and that the relief is likely to be short-lived.

The backdrop

The rupee has come under sustained pressure from global dollar strength, elevated crude oil prices and portfolio outflows. On October 7, the RBI had raised the repo rate by 0.25 percentage points to 5.50 per cent, and the latest package targets both the supply side and the demand side of currency volatility.