India curbs exporter forex holdings

India curbs exporter forex holdings

The RBI took further measures to prop up the rupee, requiring exporters to sell half the foreign currency in their accounts and making it easier for the market to absorb large foreign exchange transactions.

By (Reuters)

Published: Thu 10 May 2012, 4:04 PM

Last updated: Tue 7 Apr 2015, 11:11 AM

The changes came a day after the rupee posted its weakest close against the dollar, and gave the currency a boost in morning trade.

While the move required an initial sale by exporters of only $2.5 billion to $3 billion in foreign currency holdings, RBI sources said, traders viewed it as another signal of the central bank’s intent to defend the rupee given a limited ability to intervene directly in the market.

The Reserve Bank of India (RBI) will also allow banks to take intra-day currency trading positions that are five times their overnight open position limit, a move which could ease intra-day rupee volatility by increasing market liquidity and giving banks more time to cover big orders.

Previously, banks could not exceed their overnight limit, although some larger banks had already been allowed by the RBI to increase their intra-day positions.

“It is interesting because China recently just abolished the mandatory conversion, but obviously the divergence reflects different challenges the two economies face,” said Andy Ji, Asian currency strategist at Commonwealth Bank of Australia in Singapore.

“Also, bear in mind that quantitative rules could be circumvented in the longer term. Therefore, its long-term effectiveness is debatable,” he said, adding that he expects the rupee to strengthen against the dollar in the next two weeks.

Limited firepower

Despite holding nearly $300 billion in foreign exchange reserves, worries about India’s yawning current account and fiscal deficits limit the RBI’s firepower to defend the rupee in the market, which means it can make only piecemeal efforts to support the currency.

The rupee, which had ended Wednesday at a record closing low of 53.82 per U.S. dollar, strengthened to as much as 52.95 in morning trade.

It eased back to 53.22 after traders realised the amount of exporter holdings to be sold, and the ongoing impact of the new requirement, would be smaller than many had anticipated.

“The amount that will come into the market is not too large, said a senior RBI official, who spoke on condition of anonymity.

“But it is important that exporters follow the letter and spirit of the facilities given in the EEFC (exchange earner’s foreign currency) account and not keep buying dollars from the market despite having dollars in these accounts,” said the official, who was not authorised to speak with the media.

The RBI has been taking administrative measures and has also been intervening in the markets in recent sessions to support the rupee, according to dealers. The RBI says it does not have a target value for the rupee and only acts to smooth volatility.

Buying time

The rupee has lost roughly 8 percent since the start of March as foreign investors have exited Indian markets. Global risk aversion spurred by weakness in Europe has also been a drag on the rupee.

“Recently, exporters were holding on to their FX on fear that the rupee will fall further. Now that they have to sell, we expect a significant positive impact on the rupee,” said Dariusz Kowalczyk, strategist at Credit Agricole CIB In Hong Kong.

“Secondly, exporters can buy FX only after utilising all the FX they already hold in the Exchange Earner’s FX account. This will reduce demand for foreign currencies,” he said.

The RBI also stepped into the market and took other measures to defend the rupee in late 2011, when the currency hit an all-time low of 54.30 to the dollar during intra-day trade.

From the start of September through February the RBI sold $20.14 billion in the spot market to bolster the rupee.

“The EEFC measure clearly shows RBI’s intent and ability to control the market in the short and medium term, which is comforting unlike last year when they responded only late December,” said Ananth Narayanan G, regional head of global markets for Standard Chartered Bank.

“But the time purchased by these measures should be used to address the fundamental issues like growth, current account, fiscal deficits.”

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