India’s central bank Thursday moved aggressively to halt a sharp slide in the rupee, imposing foreign-exchange restrictions on companies and tightening trading rules for banks, but analysts said the measures may not be enough to reverse the currency’s trend.
The move marks a stepped-up effort to put a floor under the rupee after a series of interventions by the Reserve Bank of India in the foreign exchange market in recent days failed to stem the currency’s losses.
The announcement boosted the beleaguered currency, sending the dollar down to an intraday low of INR52.94 ($0.99) compared to INR53.82 ($1.01) late Wednesday in Asia. That bounce may soon fade, however, with India’s large current account and budget deficits and entrenched inflation continuing to undercut the currency.
“The RBI is getting into micromanagement of the market but fundamental problems such as the fiscal and current account deficit remain,” said Moses Harding, head of the global markets group at IndusInd Bank. The decision to resort to such piecemeal steps indicates the RBI is running out of ammunition to protect the rupee, he said.
The RBI said in a statement that all foreign-exchange earners — including exporters — have to convert 50% of the total foreign exchange earnings kept in banks into rupees. This must be done within two weeks.
The central bank said companies will now be allowed to keep only 50% of their total foreign exchange earnings in their Exchange Earners’ Foreign Currency Accounts and that they will have to convert the rest into rupees. The EEFC accounts allow exporters to hold foreign currency in onshore accounts for imports and other expenses.
In addition, companies will have to draw down their EEFC accounts fully before they buy any foreign exchange, the RBI said. The measures are also applicable to foreign-currency accounts of resident Indians and so-called Diamond Dollar Accounts held by diamond exporters.
The RBI also sought to reduce speculation against the rupee, with a separate move that fixed banks’ intraday open position limits at five times their net overnight open position limit.
The new limits are lower than the previous limits, which the RBI had individually specified for banks, three traders told Dow Jones Newswires. Open positions are unhedged currency positions.
Analysts say the measures will increase the supply of dollars in the market and provide temporary support to the rupee, which was headed toward its record low of 54.2925 to the dollar that it hit on Dec. 15.
The measures follow a series of steps the central bank has taken in recent months to shore up the rupee.
