Re stages best recovery in 13 years, but volatility persists

MUMBAI: The rupee recorded its strongest recovery in 13 years, rising 173 paise to close at 93.1 from Tuesday’s 94.83, after RBI tightened rules to curb speculative bets and forced a sharp unwinding of dollar positions.

However, with a fresh round of US bombing in Iran post market hours, which resulted in global oil prices surging further, dealers are wary of a fresh wave of volatility when forex markets open next week.

Thursday’s rebound followed a series of regulatory steps aimed at squeezing short positions and arbitrage trades. The central bank barred offshore non-deliverable forwards, restricted rebooking of cancelled foreign exchange contracts, and capped banks’ forex positions at $100 million, triggering heavy dollar sales in the domestic market.

The measures lifted the currency while widening the gap between onshore and offshore markets, and pushed up hedging costs. RBI had taken similar measures in 2013 to stabilise the currency after a sharp fall.

The rupee had been under pressure from a surge in oil prices driven by the West Asia conflict and global risk aversion, which widened the current account gap. The currency fell over 4% since Feb 28 before its recovery, and around 10% in FY26, making it among the weakest in the region.

Rupee had breached the 95 level earlier in the week and closed at 94.70 before hitting a low of 94.84. Markets are closed on April 3 on account of a public holiday for Good Friday.

Dealers said that the no deliverable forward market, which functions with both parties placing bets in foreign currency on​ rupee’s movement direction, has emerged to be larger than the spot market. With many players betting on the rupee weakening in the offshore markets, banks have been able to arbitrage by buying dollars in the onshore market and selling them offshore. These trades have added to the pressure on the rupee.

RBI curbs have reduced market liquidity, widened bid ask spreads, and fragmented trading across segments. A fallout of the curbs would be reduced interest in Indian bonds as the cost of hedging them have gone up.

Dealers said that the rupee will continue to receive support with banks unwinding open positions on dollar ahead of the Apr 10 deadline, with the currency seen trading in a range of around 92.20 to 93.20.
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