India steps up currency defense with tougher US Dollar curbs — Reuters
India unveiled a new measures to boost the Indian Rupee (INR), redirecting oil companies' US Dollar purchases away from the spot market and tightening hedging rules, Reuters reported on Saturday. The move comes as the domestic currency trades near record lows.
The Reserve Bank of India (RBI) announced the measures amid persistent pressure on the INR, driven by rising oil prices and higher global bond yields. The Indian central bank will establish a special window to meet the daily dollar requirements of three state-run oil-marketing companies, easing pressure on the spot market.
The mechanism, which has been used during periods of currency volatility, allows the RBI to supply dollars directly to oil companies from its foreign exchange reserves. Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation will be eligible to use the facility starting Monday, according to the RBI.
Market reaction
At the time of writing, the USD/INR pair is down 0.02% on the day at 96.77.
RBI FAQs
The role of the Reserve Bank of India (RBI), in its own words, is "..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.
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