Indian banks urge RBI to reconsider $100M forex cap
What's the story
Indian banks have urged the Reserve Bank of India (RBI) to reconsider its new limit on net open foreign exchange positions. The proposed cap, set at $100 million, could lead to huge mark-to-market losses and require unwinding of trades. The banks suggest that the rule should only apply to future trades and incremental positions taken after April 10.
Market impact
Banks hold $40 billion short-term positions
The total short-term positions of banks in the market are estimated at about $40 billion. A sudden cap, according to The Economic Times, could lead to major losses, especially for large public and private sector banks. The RBI's current rules allow banks to set their own board-approved limits within 25% of their total capital.
Rule details
RBI sets $100 million onshore cap
The RBI's new rule, effective April 10, asks banks to limit their net open rupee positions in the onshore deliverable market to $100 million at the end of each business day. This is part of a larger effort by the central bank to curb the sharp depreciation of the Indian rupee (INR). However, bankers have warned that if these rules remain unchanged when markets open on Monday, it could trigger massive unwinding of trades and mark-to-market losses for all banks.
Urgent plea
Bankers seek relief before Asian open
Bankers have urged the RBI to provide some relief before Asian markets open for trading on Monday. They say that if no changes are made, banks will have no choice but to start unwinding trades at huge losses. The new rule could cause major disruption in the market as banks had shifted many of their arbitrage trades to overseas non-deliverable forwards (NDF).
Loss escalation
Banks call $100 million cap small
The $100-million limit is seen as too small by banks, which used to hedge their onshore trades with offshore NDF positions. This effectively left them with a small open position. Now, with onshore trades capped at $100 million, banks will have to liquidate their dollar positions even abroad along with the onshore trades. This could further increase their losses.
Currency outlook
Indian rupee falls to record ₹94.81
The Indian rupee has depreciated by 3.5% since the start of the Iran war in late February and nearly 10% in this fiscal year. It closed at a record low of ₹94.81 per dollar on Friday. High crude oil prices have clouded the outlook for the local currency, with traders now expecting it to touch ₹96-97 per dollar if oil prices remain around $115 per barrel.