Indian central bank asks lenders to cut speculative bets against rupee: sources

IN A rare move, the Indian central bank instructed some lenders to cut their long positions on the US dollar-rupee pair on Friday (Nov 22), seeking to reduce speculative positions with the currency at a record low, four bankers directly familiar with the development said.

The financial market regulations department at the Reserve Bank of India (RBI) informally communicated the instructions to banks, they said. The RBI did not immediately respond to an e-mail seeking comment.

The rupee weakened to a record low of 84.5075 per US dollar earlier in the day, pressured by portfolio outflows and a stronger greenback.

While the RBI has previously stopped banks from adding long positions on the US dollar-rupee, it has not asked them to cut positions in recent years.

This move adds to the RBI’s arsenal of forex interventions, which includes regular US dollar sales in the spot and non-deliverable forwards (NDF) markets.

The banks’ reduction of speculative shorts against the rupee could potentially induce US dollar sales in the spot market, which would support the rupee, the bankers noted, declining to be identified as they are not allowed to speak to the media.

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In addition to asking banks to reduce speculative bets, the RBI has also asked lenders to avoid buying spot dollars to execute arbitrage trades.

“Banks have been asked to cut their long positions (the US dollar-rupee pair) and asked to avoid buying spot dollars for arbitrage traders in the futures and NDF market,” one of the bankers said.

Usually, when the rupee is under pressure, the offshore rates are higher than the onshore rate, which can create arbitrage opportunities. The NDF arbitrage increases demand for dollars onshore while providing more liquidity offshore.

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The rupee has weakened nearly 0.5 per cent so far in November, hurt by overseas investors pulling out over US$4 billion from local equities and debt and as the dollar rallied following Donald Trump’s US election victory on Nov 5.

Since then, the dollar index has gained more than 3 per cent to hit 107.2 – its highest in over a year – on bets that President-elect Trump’s policies could reignite inflation and slow future US rate cuts.

Still, the RBI’s routine interventions have limited the rupee’s slide. In contrast, its Asian peers have declined between 0.9 and 2.2 per cent this month. REUTERS