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How RBI’s rupee defence creates fresh costs for banks, importers and borrowers

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How RBI’s rupee defence creates fresh costs for banks, importers and borrowers

How RBI’s rupee defence creates fresh costs for banks, importers and borrowers

The RBI has introduced a series of measures to curb dollar demand and reduce pressure on the rupee, including a special dollar window for three state-run oil companies and a 20% Foreign Exchange Risk Reserve requirement on specified foreign-exchange derivative contracts.

Inflation has stayed above the Reserve Bank of India’s (RBI) target of 4% for the past three months (Photo: Reuters).

Banks face higher costs as the RBI’s 20% Foreign Exchange Risk Reserve requirement ties up funds against specified derivative contracts and could raise transaction costs. Importers may pay more for hedging as banks factor the higher cost of carrying currency positions into forward contracts, particularly affecting companies with large dollar exposures. Borrowers face tighter financial conditions as the RBI’s 25 basis point repo rate increase to 5.50% could eventually raise funding costs for floating-rate loans. RBI’s defence involves a trade-off, easing pressure on the rupee and imported inflation while potentially increasing costs for banks, companies and borrowers across the financial system.

Banks face higher costs as the RBI’s 20% Foreign Exchange Risk Reserve requirement ties up funds against specified derivative contracts and could raise transaction costs. Importers may pay more for hedging as banks factor the higher cost of carrying currency positions into forward contracts, particularly affecting companies with large dollar exposures. Borrowers face tighter financial conditions as the RBI’s 25 basis point repo rate increase to 5.50% could eventually raise funding costs for floating-rate loans. Advt



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