Big Banks Seek Review Of RBI’s Uniform Forex Exposure Cap

Large banks have approached the Reserve Bank of India (RBI) seeking a review of the uniform cap on uncovered foreign exchange exposure, saying the current framework does not account for differences in scale and business volumes among lenders, according to a recent news report by the Economic Times.

RBI had imposed a $100 million net open position (NOP) limit on banks when the rupee came under pressure in the foreign exchange market. The NOP measures the difference between a bank’s foreign currency assets and liabilities at the end of a business day.

Demand For A Dynamic Framework

Bankers said large state-owned and private sector banks have suggested a more flexible framework in recent discussions with the regulator, stated the news report. Under the proposal, a bank’s NOP would be linked to factors such as its capital base, size and foreign exchange flows instead of a common limit for all institutions.

According to bankers, the existing rule affects large banks more because they handle higher forex transaction volumes. Earlier, the NOP framework was linked to a bank’s capital. Later, banks were allowed to set their own limits through board approvals.

RBI had introduced the cap along with other restrictions to contain speculation against the rupee and reduce arbitrage between domestic and offshore currency markets. The measures included curbs on dollar-rupee trades in offshore markets and restrictions on cancellation and rebooking of derivative contracts. While many of these steps were later relaxed, the $100 million NOP limit remains in force.

 Impact On Hedging Activities

The rule is significant because it impacts how banks hedge their foreign exchange transactions. When exporters or importers enter forward contracts with banks, lenders usually offset these positions through back-to-back trades either in the domestic market or in offshore non-deliverable forward (NDF) markets such as Singapore, London and Hong Kong.

However, under the current framework, offshore hedging trades are not considered while calculating NOP. This means a bank buying $10 million forward in the domestic market and selling the same amount in the offshore market cannot treat the two positions as offsetting trades for NOP calculations.

This forced several lenders to unwind offshore positions earlier this year and book mark-to-market losses on NDF trades as of March 31, bankers told ET.

 Banks Seek Relief On Losses

Around April 20, the Indian Banks’ Association (IBA) reportedly sought views from member banks before approaching the RBI for a one-time relief on accounting losses arising from the NOP restrictions.

Bankers said smaller lenders were less affected because of lower forex exposure, while larger banks had the capacity to absorb the losses. However, industry officials expect discussions on revising the framework to continue once volatility in the currency market eases.