Reserve Bank of India implements measures to manage rupee and liquidity

The Reserve Bank of India (RBI) has implemented several measures to manage rupee volatility and adjust banking system liquidity. To curb depreciation pressure and speculative positions, the central bank introduced a Foreign Exchange Risk Reserve (FERR), requiring authorized dealers to maintain cash reserves with the RBI equivalent to 20 per cent of the rupee value of certain rupee-linked foreign exchange derivative contracts exceeding $2 million.

Additionally, the RBI has lowered the threshold for undertaking foreign exchange derivative transactions without established underlying exposure from $100 million to $5 million. The central bank also barred authorized dealers from permitting the rebooking of cancelled rupee-linked forex derivative contracts.

In a separate move regarding liquidity, the RBI increased the daily Cash Reserve Ratio (CRR) maintenance requirement from 90 per cent to 99 per cent. While the statutory CRR remains at 3 per cent, this change is expected to withdraw between Rs 400 billion and Rs 800 billion from the banking system. Analysts suggest this move may increase bank funding costs by 1-2 basis points, though the impact on net interest margins is expected to be limited.