RBI measures: Rupee to gain sharply but forex liquidity likely to dry up
The Reserve Bank of India's new anti-speculation measures are expected to strengthen the rupee but risk causing a liquidity crunch in the forex market. Banks are struggling to price trades due to the new 20% interest-free cash reserve requirement, which threatens to increase hedging costs for corporate importers.
Why it matters
These regulatory changes could inadvertently paralyze legitimate corporate hedging activities and increase operational costs for businesses, potentially destabilizing the broader Indian financial market.
MUMBAI: Forex dealers expect a gap opening in the rupee-dollar exchange rate, with the domestic unit likely to record its sharpest gain in recent times. However, there is also a looming market freeze, with RBI's aggressive anti-speculation measures risking paralysis of legitimate market-making, choking interbank liquidity and inadvertently penalising genuine corporate hedgers.Oil companies, normally the market's largest daily dollar buyers, will source dollars through RBI's special window, while stricter documentation rules could slow other commercial purchases. Meanwhile, RBI's dollar sales and expectations of rupee appreciation may prompt holders to sell dollars, adding to downward pressure on the dollar."While the weekend measures will support the rupee in the immediate term, liquidity in the forex market could dry up very quickly.
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