He added that once this technical adjustment phase concludes, the rupee will revert to being driven by underlying fundamentals, including global cues and foreign investor flows. He also expects the onshore-offshore spread to normalise to 50–60 paise, reversing the near-zero levels seen in recent sessions.
Edited excerpts:
Q: After the March 27th RBI circular capping net open positions at $100 million daily from April 10, why was there a second circular last evening? What arbitrage were corporates exploiting?
A: RBI, since we are a restricted currency, allows usage mainly for trade, foreign portfolio investment (FPI) flows, liberalised remittance scheme (LRS), etc. Nobody can take large trading positions in India.
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What they had done was introduce a net open position common between onshore and offshore markets. Offshore participants could trade and take open positions — long or short — based on their views.
Earlier, intervention was mainly to fulfil India’s demand. But now, intervention was also fulfilling traders’ demand, making it ineffective.
The circular came. Ideally, the reaction should have been immediate, but it wasn’t. Some participants expected dilution, and there was lobbying. Some banks booked losses or unwound positions.
When you plug one route, banks are not allowed, but keep another window open, the plugging is ineffective. That’s what RBI addressed in the second circular, ensuring that even onshore money couldn’t bypass the restriction.
What will happen now is that the onshore-offshore spread will widen. It had come down to almost negligible. Friday, it was near zero, Monday about 60 paise, and now about ₹1. It should stabilise around 50–60 paise, similar to levels seen 2–3 years ago.
Q: With the rupee at 93.32 this morning, did RBI intervene, or is this purely the effect of the circular?
A: There was a guesstimate when the circular came on March 27th. Nobody knows the exact number except the RBI. Banks active across onshore and offshore markets had cumulative positions, with estimates ranging from $20 billion to $40 billion.
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They were long rupee onshore and had sold in the non-deliverable forward (NDF) market. Now, because of the circular, their NDF positions remain, but they must unwind their long rupee positions in India before April 10.
That selling, whether $20, $30, or $40 billion, is what’s driving the move. Only regulators and banks know the exact figure; the market is estimating.
Q: With the April 10 deadline approaching, what near-term levels are you watching?
A: Near term, levels should remain around here or possibly lower, assuming even the lower estimate of $20 billion.
Once this unwinding is done, normal flows will take over — good news, bad news. It doesn’t mean the rupee will always appreciate. If negative developments or FPI outflows come in, that becomes a different factor altogether.
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