Indian importers keep hedging rupee exposure even as RBI makes forwards costlier

what happened

Indian importers are still locking in future dollar purchase rates to shield themselves from rupee depreciation, even though banks now charge more for these trades. The Reserve Bank of India has ordered lenders to hold cash reserves against a fifth of the face amount of forward dollar sales. Banks are handing that expense to customers, so importers now pay roughly 11 to 14 paise extra per month to hedge. According to Reuters, bankers who asked not to be named said the rupee's rebound after a set of RBI support steps has offset much of that burden.

The rupee reached 94.72 per dollar on Wednesday, strengthening from about 96.70 a week earlier. Costs depend on each bank's funding expense and rise with contract length, so short contracts of up to three months have become the main hedging tool. Samir Lodha, managing director at Mumbai-based QuantArt Market Solutions, advised importers to hedge over the shortest feasible horizon and consider low-cost options, which can offset part of the added charge.

why it matters

The RBI's rule effectively makes forward cover pricier, which keeps dollar demand alive and complicates efforts to support the rupee. A stronger currency makes forwards attractive again and can draw importers back into the market, potentially renewing the dollar buying the central bank wants to limit.

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instruments