Last year’s upsetting choppiness suddenly looks like a thing of the past, as a stronger rupee has paved the way for high-street banks to have a greater play in the currency market.
Recently, the Reserve Bank of India (RBI) told several large lenders that they are free to carry out foreign exchange proprietary trades in which bank treasuries bet on the dollar-rupee movement.
The move will intensify the currency market and offer finer foreign exchange rates to customers, particularly large corporates with regular exports, imports and dollar borrowings.
The RBI allows each bank a certain net open position (NOP) limit for prop (or, proprietary) trades; the limit varies from $20 million to $100 million, depending on a bank’s size and level of treasury activity.
Treasury heads of three banks confirmed that RBI officials have informally communicated that banks can resume trades under respective NOP limits. So, if a bank’s NOP limit is $50 million, it can run a maximum net buy or sell position of $50 million.
“There is no formal circular, just as there was no written directive when the limits were brought down last September. It’s in the nature of general advisory…. A few weeks ago, around early May, banks were told that they can use their NOP limits,” said one of the senior bankers.
Last August, a group of foreign portfolio managers had hammered the rupee in offshore markets by taking huge positions — running into billions of dollars — in non-deliverable forwards (NDF), and at the same time selling government of India bonds in India.
As the rupee came under pressure from these FII prop traders in debt, a few large companies and banks cut arbitrage deals by cashing in on the difference between the forward dollar rupee rate in India and what was trading in NDF markets of Hong Kong, Singapore and London.
“That was when the RBI told us to use NOPs as little as possible,” said a banker.
The rupee had touched a low of 68.95 against the US currency in August 2013. It was a time when research arms of some international banks were predicting levels well beyond 70.
Since then, the situation has changed: after plummeting 13% in 2013, the rupee has climbed a little over 4.5% in 2014 so far. It closed at 59.10 on Friday following a gain of nearly 2% in May.
In the past two months, the risk premium on the rupee has weakened so much that many foreign investors are buying Indian debts without covering the currency exposure.
A higher rupee and stability in the forex market have give confidence to the government and regulator to consider dismantling some of the restrictions.
According to market sources, financial market regulators are planning to allowFIIs and banks to trade in currency futures — a commitment made by the previous government.