Banks’ total short-term positions in the market is estimated at about $40 billion, and a sudden cap “will lead to big losses, particularly for large public and private sector banks,” a person familiar with the parleys told ET.
To minimise the impact, banks have suggested that the central bank apply the rule only to future trades and incremental positions taken after April 10. This would allow banks to limit losses emerging from the unwinding of offshore non-deliverable forward (NDF) trades.
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Late on Friday, the RBI asked banks to limit their net open rupee positions in the onshore deliverable market to $100 million at the end of each business day, effective April 10, as part of its efforts to check the rupee’s sharp fall.
“Banks met the RBI on Saturday to work out a solution since if these rules remain when market opens on Monday, there could be a huge unwinding of trades and mark-to-market losses for all banks,” the person cited above said.
Bankers said the RBI should provide some relief before the Asian markets open for trading on Monday, or banks will have no option but to start unwinding trades at huge losses.
An email sent to an RBI spokesperson did not elicit any response till press time on Saturday.
The current rules say banks can set their own board-approved limits within 25% of the total capital.
“The new rule could cause serious dislocation in the market because banks had moved a lot of their arbitrage trades to the overseas NDF. Unwinding those to reflect onshore positions could lead to an abnormal price movement,” said a second person familiar with the developments.
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Bankers said the $100-million limit is very small because banks used to hedge their onshore trades with offshore NDF positions, effectively leaving 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, magnifying their losses, they said.
“While banks understand that drastic measures have to be taken to prevent the rupee from a free fall, it can be a bit nuanced,” said the second person aware of the development. “Keeping the move only for future trades will give banks a breather because otherwise huge mark to market losses have to be booked till April 10.”
The rupee has depreciated 3.5% since the start of the Iran war at the end of February and nearly 10% in this fiscal year. It closed at an all-time low of Rs 94.81 per dollar on Friday.
High crude oil prices are clouding the outlook for the local currency, with traders now expecting the rupee to touch Rs 96-97 per dollar if oil prices remain around $115 per barrel.
Many banks have bought dollars in the domestic market while at the same time hedging these trades by taking an opposite position in the NDF market.
Unwinding of these trades could force banks to sell dollars here and buy in the NDF at higher spreads, exposing them to losses.
