India's central bank has come to the rescue of the Rupee by launching several measures that should trigger a retracement in USD/INR to around 52 in the short term and enhance the space to run an easier monetary policy.

However, the Royal Bank of Scotland says these measures can not be an effective substitute for policy reform. Neither can they obviate the need to rein the fiscal and current account deficits. A key fall-out of these measures would be a meaningful shift in FX activity from the onshore to the offshore (NDF) markets.

Under the new measures residents can no longer rebook a cancelled contract regardless of the tenor or type of underlying exposure. Until now, residents were allowed to hedge current account transactions falling due within 12 months and rebooking of forward contracts was common practice.

Importers can now hedge their FX exposure only to the extent of 25% of the average of the previous three financial years' actual external trade turnover or the previous year's turnover (which ever is higher). The previous limit was 75% of the higher of the two measures.

All cash/tom spot transactions by authorised dealers acting on behalf of their clients can now be undertaken only for actual remittances/delivery and can not be cancelled/cash settled.

The measures also impose restrictions on Foreign Institutional Investors. FIIs, both in the equity or  debt space, will not be allowed to rebook cancelled forward contracts, although the contracts can be rolled over upon maturity.

Open positions of banks: Net overnight open positions (NOOP) of banks will be reduced across the board and the revised level will also define the maximum intra-day position of banks.

"The main and immediate implication of these measures is that both spot and forward rates will retrace sharply to around 52," notes the RBS. This retracement will principally be driven by a combination of exporter hedging and unwinding of USD long positions by importers. This dynamic will be reinforced by the reduction in NOOP of banks.