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The RBI move directing exporters to convert 50 per cent of the balance held in EEFC account into rupees is not likely to have much impact on the direction of the rupee.
But volumes in the foreign exchange market can decline as a result of this move.
Placing a limit on intra-day positions appears to be a move by the central bank to restrict speculative activity in the foreign exchange market.
The rupee movement is not expected to be significantly impacted by the central bank's move. Participants in the foreign exchange market expect about $2.5 billion to be converted into rupees over the next fortnight as a fallout of this move. That translates into roughly $250 million per day. Given the average daily volume of around $11 billion over the last six months in the OTC market, this is not expected to improve rupee demand too much and help it to strengthen on a sustained basis.
Volume Impact
As the balance in the EEFC account reduces by half, companies hedging these balances could reduce their transactions to that extent too, possibly reducing the volume in the foreign exchange market.
Stipulating that the intraday open position or the daylight limit of the authorised dealers should be five times the net overnight open position limit seems to be aimed at curbing excessive intraday swings caused by speculative activity. Last December, the RBI had reduced the net overnight position limit of all authorised dealers and frozen the intraday limits at the overnight open position limit existing prior to the notification.
This clampdown had hardly any impact on volumes. The average daily volumes, while not increasing, have remained unchanged in the first four months of this year.
By linking intraday limits to overnight limits as prescribed in December, the RBI is attempting to yet again restrain volatility in rupee.
“Over the last 11 years, the average yearly movement in the dollar-rupee exchange rate was only 11 per cent. The rupee has already moved from 53 to 48 and is now back at 53,” said Mr Vikram Murarka, Chief Currency Strategist, Kshitij Consultancy Services.
Wrong signal
The move also sends the signal that the central bank is now running out of ammunition for direct intervention in the foreign exchange market and, hence, is resorting to policy tweaks.
According to Mr Murarka, the RBI can consider rolling back the curb on cancelling and rebooking forward contracts. This could be restricted to exporters.
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