The Reserve Bank of India has decided to intervene in the exchange-traded currency derivatives (ETCD) market, if required, to defend the rupee as it hovers near a two-year low against the dollar.
The central bank said in a statement on Wednesday that the decision is aimed at managing excessive volatility and maintaining orderly conditions in the currency market.
The RBI already intervenes in the spot foreign exchange market as and when required, it said.
The central bank didn’t specify if it has already intervened in the currency futures market saying only that it will publish the data for such intervention in its monthly bulletin, as it does for intervention in the spot market.
The RBI’s decision comes at a time when central banks around the world, especially in emerging market economies, are gearing up for an increase in interest rates by the US Federal Reserve for the first time in nearly a decade.
The hike, widely expected next week, would drive demand for safe-haven assets and could lead to an outflow of money from emerging markets such as India.
Already, foreign investors have been pulling out money from India’s stock markets that are now at a three-month low. Foreign institutional investors have been net sellers of shares to the tune of Rs 42,870 crore ($6.4 billion) until December 8 in the current fiscal year.
The rupee has also been falling against the dollar and hit a two-year low last week. The local currency slipped for five days in a row through Tuesday against the greenback on domestic foreign exchange markets, but ended a tad higher at 66.83 on Wednesday.
The RBI, which usually intervenes in currency markets through state-run banks, opened the currency derivatives market for foreign portfolio investors in June 2014.
It had last altered rules for the ETCD market in February to provide greater flexibility to both foreign portfolio investors and domestic participants.
In the February bi-monthly monetary policy review, the RBI had relaxed the limit for domestic entities and foreign investors to take foreign currency positions in the dollar-rupee pair on the ETCD market to $15 million per exchange without having to establish the existence of any underlying exposure. It had also revised the aggregate limit to $5 million equivalent per exchange for euro-rupee, pound-rupee and yen-rupee pairs.