RBI Governor Sanjay Malhotra says forex curbs target speculation, not capital controls

RBI clarifies forex curbs are regulatory, not capital controls

Reserve Bank of India Governor Sanjay Malhotra told Moneycontrol on Monday that the tightening of foreign‑exchange rules introduced on 10 October is intended to curb speculative trading, not to restrict capital flows.

He pointed to data the central bank has been monitoring: in recent months roughly one‑third of foreign‑exchange contracts were booked and then cancelled or rebooked on the same day. “Such same‑day cancellations indicate that a significant portion of activity is driven by speculation rather than genuine hedging needs,” Malhotra said.

In response, the RBI issued a circular that disallows the booking, cancellation and rebooking of forex contracts, tightens documentation, and slashes the transaction ceiling from $100 million to $5 million. For derivative contracts with a notional value exceeding $2 million, authorised dealers must now maintain a Forex Reserve Requirement (FERR) of 20 percent in cash with the central bank.

The measures also create a special dollar window for three state‑run oil companies – Hindustan Petroleum, Bharat Petroleum and Indian Oil – allowing them to buy dollars directly from the RBI through designated banks. This is aimed at smoothing the daily foreign‑exchange needs of these oil importers, not at influencing the rupee’s exchange rate.

Following the announcement, the rupee rallied to about ₹95.77 to the US dollar, a level it held before slipping slightly to ₹95.28 the next trading day. Malhotra stressed that the RBI does not target any specific exchange‑rate band; market forces will ultimately determine the rupee’s value.

Beyond the immediate curbs, the governor highlighted the resilience of India’s external sector. Remittances remain robust, services exports are performing well and foreign direct investment continues to flow in, bolstering the balance of payments. He cited recent free‑trade agreements, productivity‑enhancing reforms and the Production‑Linked Incentive scheme as drivers of a strong macroeconomic backdrop.

“India’s macroeconomic fundamentals are very strong, and I am confident that the country will emerge stronger from the current episode,” Malhotra said. By separating capital‑account transactions from the new FERR regime, the RBI reassured investors that equity, debt and external commercial borrowing avenues remain open.

Analysts note that the RBI’s approach mirrors its earlier March action on net open positions, signalling a consistent policy of linking financial stability with exchange‑rate stability. While the curbs tighten the hedging framework, they are framed as a means to protect market integrity and to allow the rupee to find its true level without excessive speculative distortion.

Overall, the central bank’s stance underscores a broader narrative: India’s financial system is being fine‑tuned to safeguard stability while the country’s growth trajectory and international standing continue to rise.