Rupee gains briefly as RBI tightens P-note rules for FIIs

The rupee recovered briefly after the Reserve Bank of India (RBI) today clarified that foreign investors who have issued participatory notes (P-notes) can only hedge their currency risk and that too on specific mandate from their customers.

The RBI has directed foreign institutional investors who have issued P-notes to gain approval from the note-holder before hedging.

''…If an FII wishes to enter into a hedge contract for the exposure relating to that part of the securities held by it against which it has issued any PN/ODI, it must have a mandate from the PN/ODI holder for the purpose,'' RBI said in a notification issued to authorised dealer banks today.

Further, RBI directed authorised dealer banks to verify such mandates. And, in cases where this is rendered difficult, RBI has asked them to obtain a declaration from the FII regarding the nature/structure of the PN/ODI establishing the need for a hedge operation and that such operations are being undertaken against specific mandates obtained from their clients.

The RBI action helped the battered rupee push higher to 60.25 per dollar for short while as several banks turned dollar sellers. The rupee, however, closed lower at 60.43/44 per dollar against its Wednesday's close of 60.40/41 a dollar.

The rupee, the worst performing currency in emerging Asia so far in 2013, had fallen to lows around 60.90 a dollar on Wednesday, closer to its life's low of 61.21 a dollar touched on 8 July.

The P-note rules are yet another step by the central bank to curb excessive speculation on the foreign exchange market that has been hammering the rupee for some time now.