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Economy Jul 30, 2012

Rupee volatility: RBI urges corporates to cut forex speculation

Mumbai: The Reserve Bank of India wants companies to depend less on speculative trades in foreign exchange to generate profits, as it causes volatility in the rupee, and instead focus on their core businesses, a senior official said.

Large amounts of speculation by corporates had triggered huge moves in the Indian currency, prompting the central bank to impose curbs on foreign exchange derivative products, Reserve Bank of India Executive Director G. Padmanabhan said in a speech on Saturday that was published on the website on Monday.

"The Reserve Bank believes that corporates should be concentrating more on their core business to generate returns rather than looking to generate alpha from diversifying into trading in forex markets," Padmanabhan said.

Padmanabhan encouraged companies to use appropriate hedging tools to protect their balance sheets from being hit by excessive forex volatility. Reuters

To reduce volatility in the foreign exchange market and curb speculative trading, the RBI in December said foreign institutional investors and domestic companies would not be allowed to re-book forward contracts once cancelled.

The RBI has also reduced banks' net overnight open position limits.

However, earlier this month, the RBI relaxed forward contract re-booking norms for domestic companies.

Padmanabhan encouraged companies to use appropriate hedging tools to protect their balance sheets from being hit by excessive forex volatility.

"Leaving risks unidentified and hence unmanaged is as much a sub-optimal phenomenon as using ill-understood products for managing risks," Padmanabhan said.

The central banker also flagged concerns over importers entering into risky unhedged forex transactions, without adequate protection.

A significant pass through of current global events are increasingly impacting the rupee's volatility, he added.

The rupee has fallen more than 4 percent against the dollar so far this year.

Foreign investors' concerns over government inaction to undertake long-pending fiscal reforms, slowing economic growth, stubbornly high inflation and global uncertainties pushed the currency to a record low of 57.32 to the dollar on June 22.

The rupee has recovered some ground since then and was trading at 55.45 on Monday.

Reuters

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