Falling rupee triggers curbs on FX positions; more steps likely to attract dollar inflows

The rupee closed at 95.28 against the US dollar Tuesday. Its slide past the psychologically significant level of 95/$ has already prompted the central bank to impose curbs on banks’ net open foreign exchange positions late March. Renewed pressure in May has fuelled market expectations Mint Road may take more steps to stem the slide, with measures targeted at NRIs to draw in dollar deposits – the most durable and readily accessible route to replenish a fast-depleting cash stash.

Here’s a quick wrap of RBI measures through the decades to cushion INR

2008–09: Lehman Brothers collapse

• Raised FCNR(B) deposit rate ceilings and eased trade credit rules for imports to cut onshore spot dollar demand
• Rupee before RBI action- 49-50. After RBI action - strengthened toward 44

2013: Taper tantrum

• A special FCNR (foreign currency non-resident) swap window offered fixed 3.5% p.a. interest for three years to attract dollar inflows
• Rupee before RBI action- depreciated from 63 to 68.8 in 7 days
• After RBI action - strengthened toward 59

2022: The Russia-Ukraine war

• First Federal Reserve rate hike after Covid pandemic
• Special Rupee Vostro Accounts (SRVA) allow exporters/importers to invoice and settle trade directly in rupees.
• Rupee before RBI action - 79-80/$. After RBI action - between 81 and 84 until late 2023

2026: US-Iran Conflict

• Net open positions for banks cut to $100 mn in overseas derivative markets, while state oil companies get special dollar liquidity windows
• Rupee before RBI action deprecated from 90/$ to 94.83 in March. After RBI action, stabilised around 92.58 levels in April Local currency closed at a record low of 95.28/$ on May 5