Having just come off a policy rate hike to fight domestic inflation, the RBI has turned its attention to the external sector. The series of recent measures took markets by surprise as they were both sudden and severe.
Drastically slashing the threshold for derivative transactions without proven underlying exposure, requiring banks to set aside 20% cash against certain FX (foreign exchange) contracts, banning rebooking of cancelled rupee-linked foreign exchange derivative contracts were aimed at speculators.
As a supportive measure, RBI also opened a special window to supply dollars directly to state oil refiners (IOCL, BPCL, HPCL) to avoid impacting FX markets.
These seemed harsh as they also impact genuine importers who needed to hedge. But the effects were almost immediate with rupee rebounding to hover around Rs 94-95 to a dollar. This also seemed to validate the hypothesis that speculative activity was behind the rupee’s volatility. But that is not entirely true as the pressures had been building up over months.
The rupee looked to breach Rs 97, crude had risen to $116 and US treasury yields at 5.35% were sucking foreign capital out. These, along with RBI intervention and other factors, had led to FX reserves falling steeply by $50 billion in just four weeks.