Measures taken by Bank Negara Malaysia to curb speculation on the ringgit is scaring off foreign investors, as it is making it difficult for them to hedge their exposure to the local currency, reports Bloomberg.

"While it has successfully reduced ringgit volatility, it is threatening to discourage overseas investors," wrote the publication in an article today.

The publication said that the central bank’s steps to curb trading in offshore non-deliverable forwards (NDF) last year has made it harder for global funds to hedge their exposure.

It quoted central bank data that Macquarie Bank Ltd Global funds cut holdings of Malaysian debt by a combined RM25.2 billion in November and December, the biggest two months of outflows since 2008.

The business publication quoted Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank Singapore, who posited that the NDF crackdown has done some harm for market players.

“While Bank Negara can say the onshore US$/RM deliverable forward market could provide that hedge option, it is less liquid, certainly for after hours trades. The cost of hedging for foreign investors has definitely risen at the margin," he said.

Bloomberg explained that traders remained wary even after central bank governor Muhammad Ibrahim allowed for greater hedging flexibility in the onshore currency market in an attempt to discourage the use of NDFs.

It related that the difference between onshore and forward prices for the ringgit jumped to a record in November last year resulting in the volatility of the currency, spurring the central bank to crack down on NDF trading. The central bank had then warned foreign banks not to engage in NDF-related transactions.

And while this led to the currency’s volatility dwindling to 2.5 percent last week, the lowest since December 2012, Bloomberg quoted an analyst who said that the move affected confidence in the ringgit.

“The initial imposition of the NDF restrictions did lead to talk of the potential of further restrictions and even capital account closure,” said Julian Wee, a senior market strategist at National Australia Bank in Singapore.

“These sort of measures tend to lead to a loss of confidence in the market, which was already jittery. However, the overall direction and movement in the dollar-ringgit has been due to the overall dollar trend in addition to BNM’s inability to resist it.”

The currency slid to the weakest since 1998 even as oil prices stabilized, the region’s worst performer after the yen, the weakest since the Asian financial crisis.

A Bloomberg survey predicts that the ringgit will slide to RM4.53 per US Dollar by mid-year. As of noon today, the Ringgit stood at RM4.4370 compared to the US dollar.

Bank Negara however, dismissed speculation it was about to impose capital controls, though as noted by observers, the ringgit may continue to fall as the central bank will be hard pressed to defend its position with dwindling reserves.

The publication noted that Bank Negara reserves dropped to a 14-month low of US$94.3 billion, as of Jan 13.

Though not everyone is pessimistic, like the United Overseas Bank Ltd which predicts the ringgit will strengthen to RM4.35 per US dollar mid-year, as crude oil prices increases, oil-related products being Malaysia’s second-largest export.