RBI cracks down on forex speculators

The Reserve Bank of India (RBI) is reported to have warned forex traders against huge speculative currency trading positions amidst continued decline in the rupee's value against the US dollar.

The rupee, which ended at a lifetime low of 60.52 to a dollar last week, continued to rule near 60 levels during the first two days of this week as well.

On the interbank foreign exchange market, the rupee closed trading at 59.66/67 today against its previous close of 59.51/52. The Indian currency traded in a 59.17-59.7150 band during the session.

The rupee has also been hammered by heavy selling in debt and equity by foreign investors in recent weeks.

RBI, which regularly monitors forex positions – both inflows and outflows - is reported to have made discreet phone calls to trading desks asking traders to cut their speculative positions in the currency, a rare thing for the central bank that mostly keeps off the market.

RBI is said to have made several calls to banks asking them to cut their intraday net open position limits or their outstanding positions in futures and forwards markets.

RBI, which has a limited forex backing, cannot enter the market every time the rupee falls considering that its US dollar foreign reserves given they are enough to cover only seven months of imports.

RBI also cannot fully curb speculation in the roughly $8-9 billion currency futures and forwards markets in India without running the risk of driving out further currency trading to offshore markets such as Singapore via non-deliverable forwards, choking off liquidity and creating volatility.

A ballooning current account deficit and continuous outflows of speculative foreign exchange have combined to place the RBI in an unenvious position where policy action becomes a futile exercise.