MUMBAI: The Reserve Bank of India has partially lifted the curbs on banks' foreign exchange transactions imposed after the rupee came under attack from currency speculators in December.
While the exchange market may not be entirely out of the woods and the rupee can again come under pressure if Indian companies fail to roll over their dollar borrowings, the regulator has given some headroom to banks which were finding it difficult to meet client demands.
Several banks, including large lenders such as State Bank of India, ICICI Bank, HDFC Bank and Axis Bank and some public sector institutions have been allowed to run higher net overnight open positions (NOP) in foreign exchange.
Banks use the open position limits - which differ from lender to lender depending on the size and level of treasury activity - to either carry out proprietary trades or buy and sell dollars to meet requirements of corporate clients.
However, the revised NOP caps are still way below the earlier limits banks enjoyed before the recent restrictions were imposed. For instance, one of the private bank's NOP limit has been raised from dollar equivalent of 50 crore to around 120-125 crore, as against the earlier limit of 350 crore.
"The RBI wants to ensure that banks make use of the limit for client needs and not indulge in speculation. It may not be the best thing to do, but these are unusual times," said the treasury head of a big bank.
While trading deals consume a significant part of the limit for many banks, particularly MNC lenders and a few private banks, open positions also help banks meet customer needs. A bank will buy some dollars today to arrange funds for a corporate that has to pay for its imports tomorrow.
The dollar bought today, captured under NOP, will lower the cost and ensure availability of foreign exchange. Similarly, for a corporate looking to convert its dollar external commercial borrowings into rupees, the bank will sell some dollars to other banks so the client can be offered a competitive conversion price.
But as the rupee turned volatile, many banks used their respective net overnight open positions to short the Indian currency, which further pulled it down. Also, foreign banks cut arbitrage deals between the onshore market and the offshore dollar-rupee market, better known as the non-deliverable forward (NDF) market, where their branches in Singapore, Hong Kong or London took a reverse position.
The overnight limits ranged between 50 crore and 500 crore. When the RBI brought in the curbs, a uniform limit of 50 crore was imposed on all banks. But, even as the central bank has selectively raised the NOPs for many banks in the past few weeks, other restrictions on forex transactions have not been lifted, said another senior banker.
The ban on corporates and FIIs betting on dollar by buying dollar forward, selling it and then again buying it back will continue. Also, corporates will have to take or give delivery of most of the dollars they buy or sell.
The rupee had fallen 18.7% between August 5, when rating agency Standard & Poor's downgraded the sovereign rating of the US, and December 31. It had touched an intra-day low of 54.30 last month. Amid FII inflows, the local currency has bounced back since the beginning of 2012, rising 8.64% since January 2. It closed at 48.69 a dollar on Friday.
The severity of curbs, similar to those the central bank had imposed during the Asian meltdown, had surprised the market. But while RBI senior officials have hinted that these are temporary measures, forex dealers think that the regulator may take a gradual approach in lifting all restrictions.
(Source- http://economictimes.indiatimes.com)
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