In a strategic move to stabilize the Indian rupee, the Reserve Bank of India (RBI) has requested major banks to refrain from expanding their positions against the currency. This measure comes after the rupee plummeted to historic lows for three consecutive days, according to four bankers who spoke to Reuters under the condition of anonymity.
The RBI’s financial markets regulation and operations department reached out to these banks on Tuesday, as the rupee teetered on the brink of breaching the 84/$ threshold in the spot market. The central bank’s immediate concern was to prevent further depreciation of the rupee, which has recently emerged as the worst-performing currency in Asia.
Although the RBI has not publicly commented on this intervention, the bankers confirmed that the informal calls urged them to “consider the existing position size and the risk limit.” Essentially, this meant the banks were advised not to add to their current trading positions on the rupee.
“The RBI did not want us to add to our existing positions,” explained a senior treasury official at a large foreign bank. These interventions, while not uncommon, are typically heeded by lenders to manage market volatility.
On Tuesday, the rupee hit an all-time low of 83.96 against the U.S. dollar. Without the RBI’s timely intervention, it could have depreciated even further. The central bank reportedly sold approximately $1.5 billion in the non-deliverable forward market before the spot market opened, a move that was crucial in preventing the rupee from crossing the critical 84 mark.
Another senior banker from a foreign institution noted that the RBI’s directive was clear: “do not aggressively bid on USD/INR for speculative positions.” Despite this, the central bank did not demand a reduction in existing positions nor issue specific instructions regarding the non-deliverable forwards market.
The Indian rupee’s recent decline has been exacerbated by the unwinding of trades that leveraged the Chinese yuan to place long bets on the local currency. In response, the RBI has been active across various market segments, including spot, futures, and non-deliverable forwards, to curb the rupee’s depreciation.
As the situation develops, the central bank’s actions underscore the delicate balance required to manage India’s currency stability amidst a complex global financial landscape. The RBI’s discreet yet decisive measures reflect its ongoing commitment to safeguarding the rupee from excessive volatility.
For now, the financial community waits to see the long-term impact of the RBI’s interventions and whether these measures will be sufficient to support the rupee in the volatile currency markets.