The Indian central bank, in a rare move, instructed some banks to cut their long positions on the dollar-rupee pair on Friday, seeking to reduce speculative bets on the local currency, which is at a record low, four bankers directly familiar with the development told Reuters.
The rupee weakened to a record low of 84.5075 per U.S. dollar earlier in the day, pressured by portfolio outflows and a stronger greenback. Foreign investors have sold a net of $3.1 billion in Indian equities so far in November, after selling a record $11.2 billion in October, putting pressure on the rupee.
On Thursday, after U.S. prosecutors indicted Adani Group’s billionaire founder, Gautam Adani, over alleged bribery and fraud, foreign investors sold $600 million. Provisional data suggests selling continued on Friday, with net sales of $150 million.
The group has dismissed the accusations as “baseless”.
Amid continued foreign outflows and pressure on the rupee, the Reserve Bank of India‘s financial market regulations department informally communicated to banks to cut long dollar-rupee positions, the bankers said. The RBI did not immediately respond to an email seeking comment.
The move adds to the central bank’s arsenal of forex interventions, which include regular dollar sales in the spot and non-deliverable forwards markets. While the RBI has previously stopped banks from adding long positions on the dollar-rupee, it has not asked them to cut positions in recent years. Banks’ reducing speculative shorts against the rupee could potentially induce dollar sales in the spot market, supporting the rupee, said the bankers, who declined to be identified as they are not authorised to speak to the media. In addition to asking banks to reduce speculative bets, the RBI has also asked them to avoid buying spot dollars to execute arbitrage trades.
“Banks have been asked to cut their long positions (on USD/INR) and asked to avoid buying spot dollars for arbitrage traders in the futures and NDF (non-deliverable forwards ) market,” one of the bankers said.
Usually, when the rupee is under pressure, the offshore rates are higher than the onshore rate, which can create arbitrage opportunities. The NDF arbitrage increases demand for dollars onshore while providing more liquidity offshore.
The rupee has weakened nearly 0.5% so far in November, hurt by overseas investors pulling out over $4 billion from local equities and debt and as the dollar rallied following Donald Trump’s U.S. election victory on Nov. 5.
Since then, the dollar index has gained more than 3% to hit 107.2, its highest in over a year, on bets that President-elect Trump’s policies could reignite inflation and slow future U.S. rate cuts.
Still, the RBI’s routine interventions have limited the rupee’s slide. In contrast, its Asian peers have declined between 0.9% to 2.2% this month.
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