India’s central bank eased rules for currency swaps to boost foreign-exchange supply in the financial system and stem the rupee’s slide to a record low this week.
The rupee extended a rebound to 0.4 percent, halting a seven-day drop, after the Reserve Bank of India (RBI) removed a US$100 million limit on net foreign-currency sales via swaps, according to a statement on its Web site yesterday. The decision will allow companies with overseas income to sell more US dollars in the local market, according to Standard Chartered PLC.
The move to relax regulations on swaps comes after RBI Deputy Governor Subir Gokarn said on Tuesday the monetary authority was weighing action to curb currency losses. The rupee touched an all-time low of 52.73 per US dollar on Tuesday and has declined 14.2 percent this year.
“This is a move to free up limits so that corporates can sell dollars,” said Priyanka Kishore, a Mumbai-based currency strategist at Standard Chartered. “Some corporates had already reached their limits and so their banks could not execute orders to sell the dollar.”
The rupee lost more than 7 percent so far this month, heading for the worst monthly decline since 2008, as Europe’s sovereign debt crisis led investors to sell emerging-market assets in favor of the relative safety of the US dollar. The Dollar Index, which tracks the currency’s performance against that of six major trading partners, rose 3 percent this month.
The rupee traded at 52.19 per US dollar at 2:38pm in Mumbai yesterday, bringing its decline in the past four months to 15 percent, the biggest drop among 10 Asian currencies tracked by Bloomberg.
Gokarn said in Mumbai the drop will have an “immediate impact” on the country’s inflation, which is the fastest among BRIC nations.
“The more the rupee drops, the more difficult it would be for the central bank to stay pat on rates,” said Arun Singh, Mumbai-based senior economist at Dun & Bradstreet Information Services India PVT. “There will be pressure on the RBI to abandon its stance and do another hike.”
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