The Reserve Bank of India (RBI) made a dramatic move to prop up its battered currency on Thursday, requiring exporters to sell half the foreign currency in their accounts, which helped to strengthen the rupee in morning trade.
The RBI also said the intraday open position trading can be five times the net overnight open limits available to them to improve liquidity in the market. Previously they could not exceed the overnight limit. The rupee rose to 52.95 to the dollar after the measures from its Wednesday close of 53.82/83, which was a record closing low.
Subramanian Sharma, director, Greenback Forex, Mumbai said that the RBI move will result in large near-term inflows. However, pent up dollar demand still exists and the rupee/US dollar will trade in the “52-53.80 band in near term.”
Radhika Rao, economist at Forecast, Singapore agreed and said ” Steps to force exporters to convert at least half of the earnings into rupee accounts will improve dollar supply at home and ease downward pressure on rupee.” She added that the RBI is not alone in takings such measures, citing the example of Indonesia which had imposed a similar regulation last year.
Andy Ji, Asian currency strategist at CommonWealth Bank of Australia, Singapore, said ”
“It is interesting because China recently just abolished the mandatory conversion but obviously the divergence reflects different challenges the two economies face. Also, bear in mind that quantitative rules could be circumvented in the longer term. Therefore, its long-term effectiveness is debatable. However, in the next two weeks, we will see USD/INR spot move lower as the new measure takes effect.”
Paresh Nayar, head of fixed income and forex trading, First Rand Bank, Mumbai, said India should see around $2.5 billion in the next 15 days, which has started showing its impact on the rupee. “But, it is important to note that once the Exchange Earner’s Foreign Currency (EEFC) funds also get exhausted it will be crucial to watch export and import imbalance.”