 "RBI gets tough with speculators to boost rupee")
In a move to clamp down on speculative activities in currency derivative trade, the Reserve Bank of India (RBI) on Thursday said that foreign institutional investors (FII) would require a mandate from participatory note (P-note) or overseas derivative instrument holders to hedge on their behalf.
Participatory notes are one of the popular derivative instruments by which offshore investors can invest in the domestic stock market without revealing their identities. The move was aimed at cutting speculation as investors were taking the arbitrage opportunity available between the offshore and onshore currency derivatives market.
“While the bank is expected to verify such mandates, in cases where this is rendered difficult, they may obtain a declaration from the FII regarding the nature/structure of the PN/ODI establishing the need for a hedge operation and that such operations are being undertaken against specific mandates obtained from their clients,” RBI said in a notification.
RBI’s move helped the rupee to touch the day’s high for a brief period as large foreign banks sold dollars after the notification was issued. However, the currency ended marginally lower than its previous close at 60.44 a dollar, compared to 60.37 on Wednesday.
“This is a regulatory mandate, which should not cause much of a concern to FIIs as the same would, in any event, be contractually followed by FIIs, even in the absence of a formal law. It is unlikely that an FII would take currency hedge positions without a contractual consent of the concerned P-note holder or the sub-account, as ultimately the cost of the hedge is likely to be borne by such P-note holder/sub-account,” said Tejesh Chitlangi, partner, IC Legal.
On July 16, RBI had said that if an FII wished to hedge the rupee exposure of one of its sub-account holders, it should be done on the basis of a mandate from the sub-account holder. RBI had received queries about the applicability of the clarifications issued on June 16 to P-note and offshore derivative instrument holders. According to dealers, the central bank also intervened in the foreign exchange market as public sectors banks sold dollars, which helped the rupee to retrench from day’s low.
During the first quarter review of monetary policy, RBI had made it clear that it is not comfortable with speculation, which is increasing the rupee volatility. About a fortnight ago, the banking regulator unleashed liquidity tightening measures to make the local currency expensive. RBI had capped banks’ borrowing from the liquidity adjustment facility and increased the marginal facility rate by 200 basis points to 10.25 per cent. These measures have made the short term rate to hit double digit figures.
On Wednesday, RBI had said it might take more steps to squeeze liquidity from the banking system. “There might be open market sales of government bonds in the future. OMO (open market operations) sales are a part of the package of tightening. We will look at that,” RBI governor D Subbarao had said in a teleconference with analysts and researchers.
RBI, along with the government, is taking several measures to check the sharp fall in the rupee. While the government had assured more reforms to encourage inflows, the central bank is attempting to curb speculation in currency market to check volatility.
Participatory notes are one of the popular derivative instruments by which offshore investors can invest in the domestic stock market without revealing their identities. The move was aimed at cutting speculation as investors were taking the arbitrage opportunity available between the offshore and onshore currency derivatives market.
“While the bank is expected to verify such mandates, in cases where this is rendered difficult, they may obtain a declaration from the FII regarding the nature/structure of the PN/ODI establishing the need for a hedge operation and that such operations are being undertaken against specific mandates obtained from their clients,” RBI said in a notification.
RBI’s move helped the rupee to touch the day’s high for a brief period as large foreign banks sold dollars after the notification was issued. However, the currency ended marginally lower than its previous close at 60.44 a dollar, compared to 60.37 on Wednesday.
“This is a regulatory mandate, which should not cause much of a concern to FIIs as the same would, in any event, be contractually followed by FIIs, even in the absence of a formal law. It is unlikely that an FII would take currency hedge positions without a contractual consent of the concerned P-note holder or the sub-account, as ultimately the cost of the hedge is likely to be borne by such P-note holder/sub-account,” said Tejesh Chitlangi, partner, IC Legal.
On July 16, RBI had said that if an FII wished to hedge the rupee exposure of one of its sub-account holders, it should be done on the basis of a mandate from the sub-account holder. RBI had received queries about the applicability of the clarifications issued on June 16 to P-note and offshore derivative instrument holders. According to dealers, the central bank also intervened in the foreign exchange market as public sectors banks sold dollars, which helped the rupee to retrench from day’s low.
During the first quarter review of monetary policy, RBI had made it clear that it is not comfortable with speculation, which is increasing the rupee volatility. About a fortnight ago, the banking regulator unleashed liquidity tightening measures to make the local currency expensive. RBI had capped banks’ borrowing from the liquidity adjustment facility and increased the marginal facility rate by 200 basis points to 10.25 per cent. These measures have made the short term rate to hit double digit figures.
On Wednesday, RBI had said it might take more steps to squeeze liquidity from the banking system. “There might be open market sales of government bonds in the future. OMO (open market operations) sales are a part of the package of tightening. We will look at that,” RBI governor D Subbarao had said in a teleconference with analysts and researchers.
RBI, along with the government, is taking several measures to check the sharp fall in the rupee. While the government had assured more reforms to encourage inflows, the central bank is attempting to curb speculation in currency market to check volatility.