Stop messing around with the rupee: RBI tells banks

MUMBAI: Stop messing around with the rupee”— a message from the Reserve Bank of India (RBI) that’s slowly but surely beginning to reach banks. At a weekend meeting in Kochi, senior RBI officials told leading banks to refrain from unbridled currency speculation and misusing open positions which can add more volatility in a choppy market.

Bankers fear that the RBI may tighten rules to curb speculation if banks don’t fall in line. The regulator hinted that it was aware which banks were building what kind of trading positions and if necessary the RBI may take a relook at the net open positions that each bank is allowed to run.

Trimming the net open position (NOP), or the net dollar position that a bank can hold overnight after obtaining RBI’s approval, can severely curb a bank’s trading bets.

“It’s one thing for a bank to buy dollars today for a customer who needs it tomorrow morning. It’s another thing to run long dollar simply to trade,” said a banker present at the meeting. The rupee has fallen by more than 17% against the dollar since Standard & Poor’s downgraded US credit rating in August.

But on Monday, the domestic currency gained from its Friday closing of 52.23 against the dollar to close the day at 51.96 —an exchange rate movement that can be partly attributed to the weekend meeting. Bankers admit that the rupee’s fall against the dollar in the past few months has tempted quite a few treasuries to short the local currency.

Besides buying dollars under the NOP limits, some of the MNC banks have carried out arbitrage deals between the onshore market and the offshore dollar-rupee market, better known as the non-deliverable forward (NDF) market. In such trades, a bank may sell a month forward in the local market and buy onemonth forward in the NDF market to lock in the gain.

The RBI team, led by deputy governor HR Khan, indicated that the central bank may tweak its policy for arriving at the daily dollar-rupee reference rate. The proposed move may make it difficult for currency traders to make a killing in NDF trades which are settled against the reference rate.