BackRBI lifts curbs on forex proprietary trading by banks
The central bank also allowed foreign portfolio investors to hedge their exposure in the exchange-traded market
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Mumbai: The Reserve Bank of India (RBI) on Friday once again allowed banks to engage in proprietary trading in the exchange-traded currency derivatives market, reversing a July 2013 ban imposed on fears that speculative trading was behind the rapid fall in the value of the rupee.
The rupee had seen steep depreciation when the central bank imposed the ban. However, the ban failed to stem the rupee’s fall and the local currency hit a lifetime low of 68.85 to a dollar in August.
The domestic currency closed at 60.19 against the dollar on Friday, against its previous close of 60.08. When the ban was imposed in July 2013, the rupee had closed at 61.21 to a dollar, falling all the way from 54.36 at the start of 2013.
In a notification on its website, RBI said banks can again conduct proprietary trading “keeping in view the evolving market conditions", within the limit of the bank’s open position and any limit that “may be imposed by the exchanges for the purpose of risk management and preserving market integrity".
Banks can also offset their positions in the exchange-traded market against their open positions in the over-the-counter (OTC) market, but keeping in view “the volatility in the foreign exchange market, Reserve Bank may however stipulate a separate sub-limit…exclusively for the OTC market as and when required".
“This is part of the process to unwind the steps taken last year and we are in a much better shape now with better current account deficit numbers and comfortable reserves," said Ananth Narayan, head (financial markets) at Standard Chartered Bank.
On Tuesday, RBI governor Raghuram Rajan said the country has enough foreign exchange reserves to ensure market stability. “We are in much better position now than last year. We have enough reserves," he said.
India’s foreign exchange reserves have risen substantially since September, partly due to a special swap scheme announced by the central bank, which allowed lenders to raise foreign currency deposits from non-residents. An increase in foreign institutional investor inflows into the equity and debt markets have also led to accretion of reserves. The forex reserves stood at $312.58 billion for the week ended 6 June, official data shows. Reserves had fallen to $275 billion in the week ended 6 September, as the central bank sold dollars to defend the falling rupee.
“Last year, everyone was buying dollars; now there is some semblance of balance and the flows have improved. By reversing last year’s steps, the Reserve Bank is just reassuring the market that those steps were temporary," said Satyajit Kanjilal, managing director at ForexServe, a currency consultancy firm.
RBI also allowed foreign portfolio investors to hedge their exposure in the exchange-traded market, a step that the central bank had said it will take at the time of its first bimonthly monetary policy review in April.
However, positions above $10 million will have to be backed by underlying securities, both for foreign and local investors including banks, the central bank said.
Allowing foreign investors to the local exchange market will improve the depth of the market and lead to better price discovery and more sophistication, said the head of treasury at a large public sector bank, asking not to be named.
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