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RBI Forex Cap Sparks Bank Losses Fear
29 Mar
Summary
- Banks fear significant losses from RBI's $100 million forex cap.
- Proposal to apply rule only to future trades suggested.
- Market faces potential abnormal price movements.
Banks are appealing to the Reserve Bank of India (RBI) to reverse its recent decision imposing a $100 million cap on net open foreign exchange positions. This measure, effective April 10, aims to curb the rupee's sharp decline but has raised alarms among financial institutions.
Industry representatives met with the RBI on Saturday to discuss the implications, highlighting potential significant mark-to-market losses and forced unwinding of existing trades. The total short-term positions are estimated at $40 billion, and a sudden cap could disproportionately affect large public and private sector banks.
To lessen the impact, banks have suggested the central bank apply the cap solely to future and incremental positions taken after April 10. This approach would allow institutions to manage losses stemming from offshore non-deliverable forward trades. Without relief before Asian markets open on Monday, banks might face substantial losses upon unwinding positions.
The current regulations permit banks to set their own limits, typically up to 25% of total capital. The new rule's implementation could disrupt the market, especially given that many arbitrage trades have been moved to overseas NDF markets. Unwinding these to align with onshore positions might lead to abnormal price movements.
