India opens a special dollar window for oil firms and tightens hedging rules to defend the rupee

The Reserve Bank of India (RBI) announced new measures on Saturday, 10 October, to support the rupee, which has lost more than 7% this year amid high oil prices and rising global bond yields, Reuters reported.

What changes

• Oil dollar window. From Monday, Indian Oil, Hindustan Petroleum and Bharat Petroleum can buy their daily dollar needs directly from the central bank’s reserves instead of the spot market.
• 20% “foreign exchange risk reserve”. Dealers must hold it on derivative contracts used to buy foreign currency against the rupee for hedging, for deals above $2 million — making protection against rupee weakness more expensive.
• Lower limits. Derivative deals allowed without proof of underlying exposure are cut from $100 million to $5 million, across all products including exchange-traded futures.

After the announcement the rupee firmed about 0.6% in the offshore non-deliverable forward market, in thin trading. ANZ strategist Dhiraj Nim said the steps should temper but not eliminate the pressure, since oil prices and capital flows remain the underlying drivers, and that the oil window will show up as a drain on reserves.

The measures come days after an RBI rate hike and more than $140 billion of inflows raised through one-off policy steps.