New Delhi: The Reserve Bank of India has asked large banks to refrain from increasing their trading positions against the rupee to support the currency that fell to all-time lows for three consecutive days, Reuters has reported.
According to the news agency, RBI officials rang large banks on Tuesday while rupee was at risk of breaching the $84 mark in the spot market.
The Indian rupee turned into the worst-performing Asian currency over the last month. Rupee’s poor performance can be attributed to the unwinding of trades where traders previously used the Chinese Yuan to finance their long positions on the Indian rupee, leading to increased selling pressure and a subsequent decline in its value.
To slow the depreciation, the RBI has intervened across the spot, futures and non -deliverable forwards segments, Reuters said.
On Tuesday, RBI officials asked banks to “consider the existing position size the risk limit,” a senior treasury official at a large foreign bank told the news agency. This meant that the RBI did not want them to add to their existing trading positions on the rupee, he said.
RBI is known to use such informal calls to prod banks to control excessive market volatility and lenders typically comply, the report said.
The rupee on Tuesday dropped to a lifetime low of 83.96 to the U.S. dollar, and would have likely depreciated more if not for RBI’s instructions and direct intervention.
To prevent the rupee from crossing the $84 threshold, the central bank is likely to have sold $1.5 billion in the non-deliverable forward (NDF) market before the spot market opened, a currency trader at a bank told Reuters.
An NDF is a type of financial contract used to speculate on the future value of a currency that does not involve actual delivery of the currency. Whereas in the spot market, commodities are traded for immediate delivery and payment.
The RBI has asked banks “to not aggressively bid (on USD/INR) for speculative positions,” another senior banker at a foreign bank told Reuters.
The bankers said the central bank had not asked them to trim their existing positions, nor issued specific instructions regarding positions in the NDF market.
