MUMBAI (Oct 12): The Indian central bank's latest measures to support the plunging rupee will raise the cost of buying protection against further weakness and slow a hedging surge that had become an additional drag on the currency, six bankers said.

The Indian rupee, the region's worst-performing currency, has lost nearly 7% so far this year and faced persistent pressure from surging oil prices and heavy foreign outflows from local equities.

The rupee fell near its all-time low of 96.96 against the dollar last week, despite US$140 billion raised via special dollar deposit schemes and higher interest rates, underscoring the challenge the Reserve Bank of India faces in stabilising the currency.

The central bank is now trying to temper corporate hedging demand by asking banks to maintain reserves against large hedges, while limiting the common practice of rebooking cancelled rupee-linked derivative contracts.

The measures could increase hedging costs by 80-150 basis points, depending on how much of the additional cost banks pass on to clients, the bankers said, requesting anonymity because they are not authorised to speak to the media.

The reserve requirement will apply to derivative transactions used to buy foreign currency against the rupee to hedge current account payments above US$2 million each.

It will not apply to capital-account transactions, such as hedging foreign equity or debt investments and repaying principal amounts from overseas borrowings, one of the bankers explained.

Banks typically charge importers a fixed margin in paisa terms for such transactions, which is relatively small for medium- and large-sized clients and somewhat higher for smaller ones, a second banker said. That he said is no longer feasible.

Corporate purchases of forward dollars rose to a record US$77 billion in September, up 80% from a year earlier, while corresponding sales were relatively subdued at US$41 billion, clearing house data showed.

Bankers said the measures aim to curb speculative activity by making it harder for companies to repeatedly cancel and rebook positions, while increasing compliance requirements for hedging transactions.

The RBI's curbs caught market participants off guard and prompted a flurry of calls and meetings between treasury officials and corporate clients over the weekend, three of the bankers cited above said.

"Bankers burnt midnight oil after the measures, similar to how the RBI did it appears," a foreign exchange salesperson at a large global lender said, whose team rushed to set up procedures, answer client queries and vet regulatory language to have systems in place for Monday morning trading.

The steps sparked a rally in the rupee in New York trading hours, which is expected to extend after onshore markets open on Monday at 9am IST. Bankers' dollar-rupee forward premiums are set to fall as the rupee surges.

Beyond tightening curbs on corporate dollar demand, the RBI has sought to temper pressure on the rupee by allowing oil marketing companies to buy dollars directly from the central bank through a special window.

"The RBI is directly targeting two major sources of daily dollar demand: oil companies and importers," said Kunal Kurani, vice-president at Mecklai Financial.

"However, past experience suggests that these kinds of fixes have limited staying power unless the underlying pressures on the currency begin to abate."

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