MUMBAI: A stronger rupee has paved the way for high-street banks to have a greater play in the currency market, with last year’s unnerving choppiness suddenly looking like a thing of the past.
The Reserve Bank of India (RBI) recently 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 deepen 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.
In 2013, when the rupee buckled under speculators’ attack, the limits were whittled down by banks to $5 million and even zero at the RBI’s instruction. While there was no formal directive, large banks, particularly multi-national lenders, were verbally told by senior RBI officials to shrink their respective limits as much as possible.
Treasury heads of three banks ET spoke to confirmed that RBI officials have informally communicated that banks can resume trades under respective NOP limits. Thus, 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 bunch 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 simultaneously 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 dollarrupee rate in India and what was trading in NDF markets of Singapore, Hong Kong and London. “That was when the RBI told us to use NOPs as little as possible,” said a banker.
In August 2013, the rupee had touched a low of 68.95 against the US currency. 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 declined so much that many foreign investors are buying Indian debts without covering the currency exposure. In other words, since they do not expect the currency to weaken in the near term, they are not spending extra on currency hedge.
A higher rupee and stability in the forex market have encouraged the government and regulator to consider dismantling some of the restrictions. According to market sources, financial market regulators are planning to allow banks and FIIs to trade in currency futures — a commitment made by the previous government.
Currency dealers believe if FIIs are allowed, the RBI will also have to permit banks to trade in exchange traded futures. (This could be over and above the NOP trades in the regular, over-the-counter foreign exchange market). Last year, with the rupee under pressure, banks were told to stay away from currency futures.
An influential group of foreign investors is lobbying with the government for access to currency futures where trades require no underlier (unlike forward deals in the OTC market). “Many longterm foreign investors like sovereign wealth funds and pension funds are buying GOI bonds. These FIIs are not asking for opening up the currency futures market… Only a small, but vocal, group of prop FII debt traders is insisting that FIIs should have access to currency futures.
These are the same set of investors who had pushed down the rupee last year by their large NDF deals,” said a senior forex dealer. Compared to permitting FIIs and banks in currency futures, restoring NOP limits for banks is not a contentious issue as it simply amounts to withdrawing a restriction that was imposed during a volatile period.