What is RBI seeing that markets aren't?

In financial markets, messages from policymakers often carry more weight than the policy itself. RBI seems to have forgotten that with its Friday night actions to contain volatility in the forex market. It imposed restrictions on transactions in forex trading, including derivatives, risk reserve for transactions, and opened a special window for oil marketing companies (OMCs) to pay for crude oil they purchase. What confounds market participants is why RBI has chosen to reach for crisis-era tools now. What has changed in less than 72 hours since Sanjay Malhotra detailed the bank's monetary policy actions and its approach to the currency? The governor even proposed a Technical Consultative Committee for Financial Markets, which could provide a more structured forum for market participants to flag concerns and for the apex bank to assess market conditions.

In the past few months, RBI concluded one of the largest forex reserve accumulation exercises, through special FCNR(B) and ECB schemes. These brought in about $140 bn and took reserves to record highs, though they have come off in the past few weeks. The state of the forex kitty and restrictions imposed on forex transactions don't square. Opening a special window for OMCs and banning cancellation of hedging contracts are measures usually associated with crisis conditions, not a few weeks after building up record reserves. Such abrupt shifts risk confusing markets about RBI's assessment of the rupee's underlying strength and extent of the pressure it faces.

Is there something RBI is seeing the rest of the market isn't? At least, that's what the market would conclude now. The restrictions may have the desired impact, for now. But the messaging will probably have the opposite effect.