Blasé Capital $ 100m shock
Instant shocks require immediate remedies, which may be completely wrong, and meaningless. One can dub the central bank’s decisions to force banks to cap their “net foreign exchange positions at $100 million” to one of those knee-jerk reactions that are laden with good intentions but are likely to result in bad unintended implications. At present, the overall short-term positions are estimated at $40 billion, and unwinding them immediately can be chaotic, messy, and loss-making. The banks warn that doing so may trigger high mark-to-market losses, as the positions are equated to present prices and rates, and force the unwinding of the trades that may prove profitable in the future. According to the bankers, the central bank needs to give more time to unwind the existing trades. Even better, maybe impose the restrictions on the future, and not existing, trades. This will give ample breathing space.
Obviously, the central bank’s decision to limit the short positions at $100 million at the end of each business day, starting April 10, stems from fear and scare, possibly political pressures, and as a measure to send the warning signals to the short sellers and speculators. The idea is to protect the rupee, and stop its free fall against the dollar. The fear comes from the fact that despite massive interventions by the central bank, the rupee’s slide continues. It falters for a day or two, and then glides downward. At present, it is nearing INR 95, and has more than doubled against the dollar since Covid (January 2020). The Iran war has further shattered the Indian currency, with the central bank unable to apply the brakes. In fact, the brakes seem to have failed. There is a risk of a downward movement towards INR 100, and higher.
This is where the political pressures make a meaningful entrance. For months, at least since 2025, the official loyalists claimed that a weaker rupee was a good thing for a growing economy. Most nations that grew at frenetic paces at different periods, like Japan in the 1980s, South Korea in the 1990s, and China over a few decades, found that their currencies took a beating as growth escalated. The same was possibly true of India, which has emerged as the engine for global growth. Later, they maintained that a weaker rupee helps exports. But it makes imports expensive, and possibly skews the trade deficit negatively. In the recent past, social media memes have ridiculed the central bank, and regime’s supporters. They quote how the rulers had made fun of the previous regimes when the rupee fell in the past. The currency shoe has begun to pinch politically, and may have repercussions.
But as is natural in such circumstances, and possibly true, the central bank, and the political masters feel that a large part of the rupee’s fall is contributed by short sellers and speculators. The banks indulge in it as it gives them scope to make easy profits. Until the war lasts, the downward pressure on the currency will continue, and any reasonable person will assume a short position, which is hedged, and can be changed when the situation is different. This adds to the pressures. Putting a curb on daily short positions is the easiest, and possibly quickest, way to curb speculation. It sends a warning to the erring banks, institutions, and individuals to stay away, or face drastic and dramatic action. Since the central bank cannot act against the latter two entities, it targets the banks, which are under its control. The banks, forced to unwind rapidly, become the loss-makers.
According to media reports, this is possibly the first time in nearly 15 years that the central bank “placed curbs on the size of bets that banks can take in the currency markets, taking away powers, hitherto, vested with bank boards. The move comes at a time when the rupee is under pressure due to a combination of sales by foreign institutional investors, a rise in the oil import bill, and the overhang of tariffs and visa curbs on exports.” But some experts feel that the step may create more credibility among the speculators that the central bank is unable to protect the rupee, which is likely to fall further, even if the banks are taken out of the equation. Something similar happened with the regime’s energy policy. On the one hand, it categorically announced that there was no energy shortage. On the other hand, it increased LPG cylinder booking time from three to five weeks, imposed windfall taxes on energy exports, raised domestic prices, and lowered excise.
Experience teaches us that ad-hoc, extreme, and knee-jerk actions do not work during crises. In many instances, they accelerate the effects. But policy-makers and regulators cannot lie idle during such times. They need to show their power and strength, and ability to control the situation. Hence, they need to do something, anything. This prompts them to quickly move from denial, everything is normal, stance to the other end, where anything is legitimate. Put the brakes. Increase the curbs. Stop people from buying, using, and speculating. But this turns out to be a bigger nightmare. Even in emergencies what is required to take several steps, but logically, with thought-out implications.
