Banks Seek Three-Month Extension From RBI On Forex Position Limits

Banks have sought an extension of three months from the Reserve Bank of India (RBI) to comply with the foreign exchange position limits, which were introduced, as they are concerned about incurring losses due to the rapid unwinding of positions, as per Reuters.

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The RBI on March 28 directed banks to cap their net open rupee positions in the onshore deliverable market at $100 million at the end of each business day, with the rule set to take effect by April 10, Reuters reported.

Concerns Over Rapid Unwinding Of Positions

Following the announcement, senior treasury officials from domestic and foreign banks met RBI officials to convey concerns regarding the implementation timeline, according to Reuters.

Banks have also indicated that immediate compliance could trigger an abrupt unwinding of arbitrage trades that occur between non-deliverable forward markets in offshore markets and onshore markets. Such positions are usually structured in a manner that is beneficial in terms of price differences.

According to Reuters, a significant portion of these trades falls within a one- to three-month maturity period. Banks have stated that allowing additional time would enable these positions to mature naturally instead of being exited abruptly.

Request To Maintain Existing Positions

In addition to seeking an extension, lenders have also proposed that existing positions be allowed to run until maturity while applying the new limits only to fresh trades, Reuters reported.

The banks have conveyed that a phased approach could prevent any one-sided markets from developing, which could result in losses due to forced exits.

Rupee Pressure And RBI Action

The RBI’s decision to tighten foreign exchange position limits comes amid continued pressure on the Indian rupee. The currency fell to a record low of 94.84 against the U.S. dollar on March 28 and has declined more than 5% so far this year, according to Reuters.

The weakness in the rupee has been driven by elevated crude oil prices and sustained foreign portfolio outflows following the escalation of the West Asia conflict, Reuters reported.

Implementation Timeline And Market Impact

The deadline of April 10 implies that banks are expected to align their positions in a relatively short time frame, which has sparked concerns over liquidity and prices in the foreign exchange market.

The RBI has yet to issue an official response to such demands for an extension, Reuters reported on March 30.

The talks between banks and the RBI suggest that talks are being held over the implementation of the framework, though it is in effect.