Mumbai: Banks on Saturday urged the Reserve Bank of India to reconsider its decision to cap their net open foreign exchange positions at $100 million, warning the move would trigger significant mark-to-market losses and force unwinding of trades.
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.
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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.
Late on Friday, 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 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 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.
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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.
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.
Also Read | Forex kitty slips below $700 billion as bullion loses some sheen
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.
Late on Friday, 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 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 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.
Also Read | What's key to India's forex defence? PatrPatragests it's $1 trillion buffer
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.
