RBI Intervention and Rate Comment Squeeze Rupee Hedging Costs

The Reserve Bank of India stepped into the spot and forward markets Wednesday as Governor Shaktikanta Das said the policy rate was already restrictive enough to bring inflation to the 4% target. The rupee, which had slipped in early Asia trade, recovered to 86.05 per dollar by mid-afternoon Mumbai time.

The central bank used sell-buy swaps in the non-deliverable forwards segment, draining rupee liquidity without shrinking foreign-currency reserves. The intervention, combined with Das's downplaying of upside inflation risks, compressed one-year forward premiums. Importers saw hedging costs fall as a result.

Das told a banking event that the repo rate at 6.50% was appropriate and the stance remained neutral. The omission of the usual warning about food-price risks led traders to reduce the premium they demand for holding rupee-denominated contracts. That directly lowers the cost of dollar covers for oil refiners, fertiliser companies and other large importers.

Exporters face a narrower incentive to sell forward, which could slow their own hedging activity. For foreign portfolio investors holding Indian bonds, the improvement in net yield from lower hedging costs may support further inflows into the JPMorgan index inclusion trade.

The forex market now watches whether the RBI will hold the line near 86.00 or allow the rupee to drift wider. The governor's signal that the burden of currency management falls on liquidity tools rather than the rate-setting committee keeps the swap line as the active policy lever. The next scheduled policy review is in April.