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Dollar Above 55, RBI Needs To Open Up


The USD-INR ratio has reached Voldemort levels, meaning you don’t talk about it anymore. While the RBI ref rate is still 54.88, the trading in the spot market took the dollar up to 55 and beyond. Firstpost writes that RBI’s latest attempts to protect the rupee are not working are frustrating. First, what the RBI did was to issue a notification, saying that banks and authorized dealers can’t hedge their OTC positions with the exchange-traded F&O market. They couldn’t anyway – the exchanged demand a margin regardless of your position elsewhere.

All the RBI really said was that they will limit bank exposure in a single position of FX F&O to $100 million, before June 30. Given that the total open interest in the NSE USD-INR is concentrated in the near-month (end-May) with over $1.5 billion in exposure, and then June end which has $500 M in exposure, it won’t affect the market right now (banks can, before the notification, get upto 15% of the total open interest). The idea wasn’t to "stabilize" the rupee, it was to create a position limit, because perhaps the RBI felt that banks were too heavy in the Fx derivatives segment.

Also note that RBI can’t do much, and should not. Let the rupee slide. (And when it appreciates, let it). We have to learn about the consequences of a horrendous trade deficit (more than 10% of GDP) which has till now been covered by the foreign investments coming in. Just that the foreign investments have stopped coming in – for any number of reasons, from Vodafone to Greece. But that is structural: investments can stop anytime. But you can’t change the import/export equation easily. Thus, when the foreign money stops flowing in, the currency will depreciate.

The RBI can stem the flow by selling some of the dollars it has, and taking out rupees from the system. This is how it started the affair – it didn’t let the rupee rise when the dollars came in, buying all those dollars instead; this is the time to sell them back. (More than 70% of RBI assets are the dollars it holds) You can’t do so forever, so it’s also time to open up the rupee – full capital account convertibility, let foreigners buy our bonds, let foreigners own rupees in their accounts, and make it a trade currency. You do this, and in five years, we’ll be much better off. In the short term, we’re just dead anyway.


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