(March 29): Lenders in India are urging the central bank to rethink new rules for foreign-exchange transactions designed to shore up the rupee, saying the measures would saddle them with large losses, according to people familiar with the matter.
In talks on Saturday, banks sought to delay an April 10 deadline for them to comply with the rules that would require a significant amount of positions to be closed, the people said, asking not to be named discussing private matters. They said unwinding at such a scale would trigger large losses on their books and also urged that the latest regulation apply only to new bets, the people said.
The move comes as outstanding bets involving such positions amount to at least US$30 billion, the people said. These transactions involve banks purchasing dollars onshore and selling them overseas in the non-deliverable forwards market, they said. The local dollar buying has exerted strain on the rupee, which fell to a new low on Friday, weakening past the closely watched 94-per-dollar mark for the first time.
The Reserve Bank of India (RBI) said after markets closed on Friday that lenders acting as authorised dealers in the rupee must ensure their open positions in the onshore currency market do not exceed US$100 million at the end of each trading day. Previously, they were permitted to set so-called open position limits to within 25% of their capital.
The Indian currency has dropped more than 4% since the war in Iran began in late February and is Asia’s worst performer this year, as elevated oil prices compounded fears of inflation and a wider trade deficit for the import-driven nation.
Lenders will be forced to sell dollars in the onshore market to unwind bets to comply with the rule, potentially sparking sharp gains in the rupee when trading resumes on Monday, the people said. That will in turn hurt the banks that have built short positions.
See also: Iran war could be making of the petroyuan, Deutsche Bank says
In response to a request for comment, a spokesperson for the RBI referred to the central bank’s Friday circular that set the position limits.
After the central bank’s move, CR Forex Advisors now estimates the rupee to be in a range of 92.50-92.80 per dollar in the near term. That compares with Friday’s close of 94.8150.
Monday is the last trading day of the current India fiscal year as March 31 is a holiday.
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