Indian Central Bank Steps in to Save the Shun-Down Rupee

India's central bank steps in to ease volatility in the rupee as markets crossed the 61 level against the USD.

220px-Indian_rupeesEmerging market currencies have been on the back seat against the greenback as the world’s largest economy is witnessing strong economic growth post global recession. Most emerging market currencies including the South African Rand and Indian Rupee have been suffering dramatic declines as both global factors such as commodities prices and internal factors such as inflation are ploying with their rates.

The Remedy

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India’s central bank has made an attempt to save the rupee as it increases interbank lending rates and offloads government bonds. The Reserve Bank of India raised lending rates to commercial banks by 2% to 10.25% making the loans more expensive. This was followed by the RBI’s sale of government securities worth $2.5 billion (USD).

The rupee has been under fire after hitting record lows as inflation has been curbing the Indian economy. The recent volatility in precious metals has been another cause for concern for India’s financial watchdog in relation to it’s currency as the Gold-INR-USD triangular arbitrage trade found momentum with the sharp declines in the yellow metal.

“Indians love to trade Gold and with the metal on a downhill move traders are playing the arb game” explained Amit Rathi, a Mumbai based trader in a comment to Forex Magnates.

USD INR
USD INR

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Brokers in the FX and CFD markets have started diversifying their instrument offerings to allow traders access to emerging market currencies, a recent influx of brokers offering CFDs on emerging market currencies shows that volatility is still a key driver in the worlds most liquid asset class and the new offerings allow brokers to expand their product range to attract new clients.

Say no to speculation

Last week the central bank and securities market regulator, SEBI, banned banks from taking speculative trades in INR currency futures. In a statement by the RBI the central bank stated that banks: “Should not carry out any proprietary trading in the currency futures/exchange-traded currency options markets”. Banks were only able to trade on the behalf of clients.

In addition, the Securities and Exchange Board of India, the regulator that overlooks India’s equities and futures markets raised margin requirements for FX futures.

Increasing offshore volumes

The harsh movements in the Indian rupee have been favouring volumes in the offshore currency futures markets. Dubai based DGCX was the first overseas exchange to list the INR futures contract and has been witnessing record trade volumes in its benchmark INR/USD contract. A consistent theme at the CME who recently launched the contract, an un-named source from the exchange informed Forex Magnates that average daily trade volumes are picking up and have seen figures floating around the $200 million mark.

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