RBI sells dollars, curbs speculation as hits 54.3

Mumbai: The Reserve Bank of India on Thursday sold dollars through public sector banks and announced steps to curb speculation in the foreign exchange market by banks and corporates as it intervened to pull back the rupee from an all-time low of 54.3 against the dollar and help it close at 53.65. 

    After market hours, the 
RBI also announced a reduction in trading limits for banks. It added that forward contracts by businesses and foreign institutional investors, once cancelled, cannot be rebooked. Forward contracts are deals to sell the dollar at a fixed price in future. Exporters and investors enter into such deals to hedge against the risk of any sharp movement in the currency. 
SUPPORTING ROLE 
Impact of RBI measures: Thursday's steps will leave almost no room for speculation in forex markets. They will bring the rupee back a bit. But liquidity in the forex market is expected to dry up 
Expectations from today's mid-term policy review: No more rate hikes. RBI may announce its intent to ease rates in future. If RBI does ease liquidity or reduce rates, equity markets could take off, easing pressure on the rupee 
What else the RBI can do to support the rupee: 
There are several measures—sell dollars directly to oil companies, offer NRIs higher returns, or it could announce a scheme for overseas Indians to bring in their funds 'Short-term steps to stabilize mkt' 
    The restrictions come in a week in which the rupee has seen its sharpest declines. The currency which closed last weekend at 52.04 had fallen to 54.3 by noon on Thursday. During the current year, the currency has fallen by more than 18%. Many traders were expecting the rupee to hit 55 against the dollar, had it not been for the central bank's intervention. The sharp depreciation has made crude imports more expensive and threatens to add to inflation which has only now started showing signs of easing. 
    RBI's hand was forced by the sharp depreciation as the negative expectations were turning out to be self-fulfilling. The central bank acted only a day ahead of its mid-term policy review on Friday when it is expected to announce its monetary stance for the current quarter. RBI is widely expected to hold rates after industrial production dipped 5.1% in October. 
    Announcing new measures in interbank dealings, RBI said banks must square up their dollar position by the end of the day. This has been enforced by reducing the net overnight open position limit for banks. On forward contracts, RBI said all such deals booked by both exporters and importers will henceforth be on a fully deliverable basis. If any participant is forced to contract the forward contract, he will not be eligible to receive any exchange gain. 
    "These are short-term measures which market participants understand are aimed at stabilizing the market," said Ashish Vaidya, head of fixed income, currency and commodities trading, at UBS. He added that while the rupee was expected to firm up, liquidity in the forex markets would reduce. 
    Dealers said the measures meant that convertibility on merchant account — which gave traders the freedom to book and rebook contracts at will — was temporarily suspended. This is not the last of the measures expected by the central bank. Other steps that RBI could possibly take include selling dollars directly to oil companies to prevent lumpy demand from driving up the dollar. The central bank could also look at offering non-resident Indians higher returns by removing limits on interest rates on NRI deposits. "The government could also look at a scheme to encourage Indians to bring home money parked overseas through a one-time scheme," said K NDey, director, Basix Forex. 
    There is another school of thought among bankers that believes that once RBI starts easing rates, equity markets will pick up and money will start flowing into India as growth picks up. However, with inflation remaining outside RBI's comfort zone, bankers feel a rate cut is unlikely on Friday.