The Indian rupee strengthened on Monday after the Reserve Bank of India presented a package of measures to reduce pressure on the currency.
The Indian rupee rose sharply on Monday after the Reserve Bank of India announced a broad package of measures aimed at supporting the national currency. These measures were presented over the weekend and included steps to reduce pressure on the exchange rate, redirect demand for dollars, and limit speculative activity.
The USD/INR pair fell by 1.1% to the level of 95.739 rupees per dollar. By 12:59 Moscow time the quote was 96.952 rupees, which is 0.8% below the previous close.
On Saturday the Reserve Bank of India said that it would fully cover the daily dollar needs of three state-owned oil companies through a special mechanism. This will allow their purchases to be taken off the open foreign exchange market. The mechanism applies to Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp.
In addition, the central bank introduced a ban on rebooking canceled foreign exchange derivative contracts linked to the rupee. The threshold for positions without an underlying asset was reduced from 100 million dollars to 5 million dollars. Banks were required to maintain a cash reserve of 20% on certain contracts.
These steps are intended to reduce immediate demand for dollars and curb hedging that was increasing downward pressure on the rupee exchange rate.
The measures followed an increase in the key repo rate last week by 25 basis points to 5.5%. This was the first such increase in almost four years. The central bank also changed the policy stance from neutral to calibrated tightening due to inflationary risks associated with rising oil prices and sustained economic growth.
However, the rate hike did not stop the fall of the rupee, indicating pressure from high energy costs, foreign capital outflow and dollar strengthening.