The Reserve Bank of India (RBI) on Saturday announced a fresh slew of measures to shore up the rupee, including redirecting dollar purchases of three state-run oil companies away from the spot foreign exchange market and tightening hedging rules.

The RBI will open a special window for Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation to meet their daily dollar requirements, aimed at cushioning pressure on the spot market as crude oil prices have surged above $100 a barrel.

 The facility of the RBI supplying dollars directly from its foreign exchange reserves to the three oil firms will come into effect from 12 October. The access of the firms to the facility will remain in place until further notice.

Under the facility, the RBI will sell dollars to the public sector oil marketing companies through designated banks, ensuring that their daily foreign currency requirements are met without adding demand in the spot market. 

The three state-run companies need large amounts of dollars to pay for crude oil imports. The RBI said the arrangement was introduced in view of “current market conditions”.

The move is likely to ease pressure on the rupee, which has fallen over 7% this year amid surging oil prices and global bond yields. The Indian currency has been hovering around the 97-mark and closed Friday at 96.73 per dollar. 

Forex reserves also fell by $12.95 billion to $734.60 billion during the week ended 2 October.

The RBI had used a similar approach during the 2013 “taper tantrum” when the rupee and other emerging-market currencies were under pressure due to expectations of reduced monetary stimulus by the US Federal Reserve.

Tighter curbs on forex derivative trades

The RBI has tightened curbs on speculative foreign exchange derivative trades, which include a sharp reduction in the threshold for positions that can be taken without proving an underlying transaction. 

In a separate notification, the RBI has barred authorised dealers (ADs), including banks permitted to deal in foreign exchange, from allowing customers to rebook a cancelled foreign exchange derivative contract involving the Indian rupee. The restriction applies to both deliverable and non-deliverable contracts.

Customers may still be allowed to roll over contracts when they mature, the RBI clarified.

The RBI has also said that forex dealers must maintain a 20% "foreign exchange risk reserve" (FERR) on derivative contracts used to buy foreign currency against the rupee, for the purposes of hedging current account transactions. The requirement applies to rupee-linked forex derivative contracts worth more than $2 million.

The RBI has also slashed the threshold for unbacked derivative positions to $5 million from $100 million. The lower cap applies across all derivative products, including exchange-traded futures.

The latest measures follow other steps by the central bank to support the rupee. These include a concessional swap window through which banks mobilised nearly $133 billion in foreign currency non-resident (Bank), or FCNR(B), deposits. 

Despite the inflows, the central bank’s intervention in the market and a rate hike earlier this week, the rupee has remained under pressure. The underlying drivers include foreign investor outflows and oil prices. 

While announcing the bi-monthly monetary policy on Wednesday, RBI Governor Sanjay Malhotra said the rupee was undervalued and that the central bank would help stabilise it and allow it to find its correct value.