The Reserve Bank of India (RBI) on Wednesday hinted at gradually relaxing curbs on intra-day position limits in the foreign exchange market that were imposed in December to curb speculative bets on the rupee.
“Within the overarching prerequisite of facilitating genuine hedging needs of the customers, Reserve Bank would consider relaxations, in particular those relating to intra-day position limits, in a calibrated manner at appropriate time,” RBI Deputy Governor HR Khan said at the annual conference of the Foreign Exchange Dealers Association of India (FEDAI) in Zurich.
He said the administrative measures undertaken by RBI in December 2011 were aimed at curbing speculative behaviour of such entities.
“The measures did achieve the intended policy objectives and also led to an immediate fall in the volumes of the markets. The actual hedging requirements of the real sector, however, were not left unattended as we subsequently relaxed some of the measures to accommodate customer needs,” Khan said.
The Reserve Bank will continue with its calibrated and gradual approach towards liberalisation of the foreign exchange market in India but at the same time we will expect greater degree of responsibility and accountability from all the participants, he said.
Khan said the rupee was still “far away” from being fully convertible and allowing the local currency a greater international role posed risks in managing a monetary response to a stress situation.
“Unlike countries with current account surpluses, India generally has a sizeable quantum of current account deficit. The exchange rate of the Indian rupee remains susceptible to ebb and flow of external capital, especially outflows during periods of stress... hasty internationalisation could only add to our external sector vulnerabilities,” he said.
In the event of internationalisation of the Indian rupee, the exchange rate would be largely determined by the sentiments of the market forces and the present policy measures to curb such volatilities may not prove to be as effective as they are today, Khan said.