WSJ:RBI to Keep Currency-Trading Curbs Until Rupee Stabilizes
By KHUSHITA VASANT
India's central bank will roll back certain curbs it imposed on the trading of foreign-exchange derivatives, but only after the currency market has stabilized, Governor Duvvuri Subbarao said Friday.
Last month, the Reserve Bank of India barred banks from buying or selling exchange-traded currency derivatives for their own accounts as part of its efforts to support the rupee, which hit a record low against the dollar in July. At the same time, India's capital-markets regulator made it more expensive for investors to trade in currency derivatives.
"These measures were instituted to curb undue speculation that was resulting in the volatility of the exchange rate," Mr. Subbarao said at an event in the southern city of Hyderabad, according to a transcript of his speech posted on the central bank's website. "Undue volatility of the exchange rate is harmful for growth and stability and such volatility should be curbed," he said.
The rupee has lost 11% of its value against the dollar since early May, becoming one of the worst-performing currencies in the region. Earlier this week, it came close to its record low of 61.21 against the dollar. Thursday, this prompted the RBI to tighten hedging rules for foreign institutional investors.
The move brought respite to the rupee soon after, but on Friday, the currency slipped to 60.81 against the dollar in early afternoon trade from 60.43 in late Asian trade Thursday.
Mr. Subbarao also responded to criticism over the RBI's decision to allow industrial houses into the banking sector. Critics have argued that allowing companies with diversified operations to set up banks could increase the risks in the financial sector.
Mr. Subbarao defended the RBI's decision, saying that such companies would bring their entrepreneurial talent and management expertise into the banking sector. "Large corporates will also bring vast pools of capital that will go into strengthening financial intermediation and making our banking sector more competitive," he added.
The RBI has received 26 applications for an unspecified number of bank licenses it plans to issue. It will take three to four months to examine these.
