The Reserve Bank of India’s restrictions on rupee positions are set to force an unwinding of arbitrage trades between the non-deliverable forward (NDF) and onshore markets, exposing banks to potential losses, six traders said.
India’s central bank on Friday, after market hours, said banks must ensure their net open rupee positions in the onshore deliverable market do not exceed $100 million at the end of each business day, with compliance required by April 10.
Net open position refers to the residual currency exposure a bank carries after offsetting all its positions.
Under existing rules, banks can set net open position limits within 25 per cent of total capital, while the RBI retains the power to impose tighter caps to manage currency volatility.
The RBI’s decision to impose limits on onshore positions comes against a backdrop of mounting stress on the rupee, spurred by an oil price surge and heavy foreign portfolio outflows following the start of the Iran war.
The rupee has hit a string of all-time lows and is down about 4.2 per cent this month, its worst decline in over seven years, sliding to 94.84 versus the US dollar on Friday.
IMPACT ON NDF ARBITRAGE POSITIONS
Bankers explained that until now they were allowed to run large arbitrage books without breaching limits because net open position caps were calculated after netting exposures across onshore, NDF and currency futures markets.
For instance, a bank with a net open position limit of $30 million could take a much larger position in the onshore market, as long as it was offset by an opposite position in the NDF market, leaving little or no net exposure.
The RBI’s latest move changes that dynamic by placing a cap specifically on onshore positions. This means that even if positions are offset in the NDF market, any onshore exposure exceeding the prescribed limit will have to be pared back, effectively forcing banks to unwind arbitrage trades between the two markets.
Estimates of these arbitrage positions range from about $10 billion to nearly $18 billion, according to bankers.
Heightened stress on the rupee has pushed dollar/rupee NDF levels above onshore rates, opening up an arbitrage window.
Banks have taken advantage of this by buying dollars onshore while taking offsetting positions in the NDF market. Any forced unwinding of these trades would require banks to sell dollars in the onshore market and buy in the NDF market.
A rush to unwind these positions could widen the spread between onshore and NDF rates, pushing the spread well beyond levels at which banks had initiated their trades, a currency trader at a mid-sized private sector bank said.
This would erode arbitrage profits and potentially flip positions into losses, with banks forced to exit at unfavourable levels, he said.
The RBI met senior treasury officials on Saturday to discuss the market implications of the new limits, three bankers said.
The bankers declined to be identified since they are not authorised to speak publicly. A request for comment emailed to the RBI on Saturday, a non-working day for the central bank, did not receive an immediate response.
“The arbitrage between NDF and onshore markets was adding pressure on the rupee. What the RBI is doing now is clamping down on that to limit NDF spillovers and make its onshore intervention more effective,” a senior treasury official at a large private sector bank said.
Source link
#RBI #curbs #rupee #positions #force #unwinding #arbitrage #bets
