RBI cuts currency open position for banks by up to 75%

MUMBAI: The Reserve Bank of India has cut banks' net open position limits in currency trading by as much as 75% for some, and at least by half for most of the top traders, in its attempt to end speculation on the rupee, said three people familiar with the matter.

After robbing bank boards off the powers to determine the overnight positions, it is monitoring day transactions where it is liberal in intra-day trading positions which banks are not keen, said those people who did not want to be identified.

"It is quite drastic," said one of the bankers who have been directed to reduce positions without disclosing how much his bank's position has been reduced to. "For some of us, it is almost as good as nothing at all," he said.

RBI on December 15 unleashed a series of measures to arrest the fall of the rupee, including taking powers from the board to determine the overnight position, the net overnight dollar position a bank can hold, to save the rupee from falling steeply. It also took off the flexibility to cancel or rebook the forward contracts.

Hedging based on past three-year average imports was cut to 25%, from 75% making them deliverable. The domestic currency which has fallen about 20% this year, recovered from its lows of 54.20 after these measures, but has since started sliding again. It ended at 52.87/88 on Tuesday.

While the central bank's move has halted the sharp slide in the currency value, it could dry up liquidity in the currency market and reduce the earnings of many banks that have been benefitting from rupee volatility.

"Opportunity has been curtailed," says Moses Harding, head of economic research and asset and liability committee at IndusInd Bank. "Banks running proprietary positions will obviously take a hit on their other income. To that extent, banks' trading income will come down. Also, inter bank-volumes will start thinning," he added.

But the hedging activities of the corporations may not be hurt since the central bank has said the overnight positions could be breached, if it is for a client. "We are trying to cope with the fresh restriction," said another banker. "The open positions for some large banks which was about Rs 100 crore has been slashed to about Rs 50 crore," said the treasury head of a private sector bank.

"But the central bank has clarified that a bank could exceed NOOPLs if it is on account of a particular customer transaction."

Source: EconomicTimes