RBI measures to ensure orderly forex market movement, curb undue speculative activity: Governor Malhotra

The recent RBI measures, including creating a special dollar window for oil marketing companies, aim to ensure orderly foreign exchange market movement and curb undue speculative activity, Governor Sanjay Malhotra said.

Last week, the Reserve Bank of India tightened rules governing forex derivatives trades, aiming to curtail speculative bets against the rupee and asked banks to create a 20% reserve for dollar purchases.

The special window for three state-owned OMCs, who are among the biggest consumers of the dollar, given their crude import bill requirements, has been undertaken on the basis of an assessment of current market conditions.

The rupee has been appreciating against the US dollar since Friday.

Governor Malhotra said the RBI is determined to do whatever is necessary to ensure orderly movement in the foreign exchange market.

He said the purpose of these measures is primarily to ensure that there is an orderly forex market movement.

"The purpose of these measures is primarily to ensure that there is an orderly movement of the forex market. The measures that have been taken: for example, rebooking of cancelled forex derivative contracts has been disallowed. These will also check undue speculative bets," he said.

The forex reserve requirement has been introduced in response to observations of excessive speculative positioning on the buy side.

The other major announcement is basically a re-articulation, mostly procedural, regarding the documentation required, Malhotra added.

"The primary purpose of our forex markets is to meet and hedge underlying foreign exchange requirements. Unlike equities, where participants can take a view on share price movements, forex markets are intended primarily for those with a genuine hedging requirement," the governor said.

To a query, Malhotra said the central bank does not target any specific price level or band for the rupee, focusing instead on ensuring orderly movement in the currency and preventing excessive speculation.

"We observed excessive volatility and one-sided bets that were preventing market forces from determining the rupee’s true value. That is why we have taken these measures," he said.

The governor further said the domestic growth is doing very well on all fronts. Banks are well capitalised, profitable, and growing, so they are doing well.

"There are initial signs of corporates investing -- they are profitable. Earnings growth is improving right now. Household balance sheets are also pretty resilient and strong. Though there is higher leverage by households, the balance sheets are pretty strong," he said.

So overall, the governor said the Indian macro and financial institutions are robust.

He also emphasised the need to keep a close watch on the evolving geopolitical headwinds and their impact on the Indian economy.