Reserve Bank cracks down on forex speculative trading

Tough stance: Sources say the RBI has phoned trading desks with messages to cut speculative positions in the rupee

Written by Reuters | Mumbai | Published:July 3, 2013 1:48 am

Concerned about the rupee’s fall to a record low,the Reserve Bank has discreetly phoned trading desks with unusually explicit messages to cut their speculative positions in the currency,said three senior market participants with direct knowledge of such calls.

While the Reserve Bank of India (RBI) regularly monitors positions and flows in the currency market,the sources said it was unusual for the RBI to call so often or state so explicitly that banks should cut their intraday net open position limits — or their outstanding positions in futures and forwards markets.

A bank’s net open position is its aggregate exposure to foreign exchange risk.

The pressure highlights the limited options for a central bank that has seen the rupee hit hard in last month’s emerging markets rout,but is reluctant to sell too much of its US dollar foreign reserves given they are enough to cover only seven months of imports.

While the RBI has succeeded in curbing speculation in India’s roughly $8-9 billion currency futures and forwards markets,it also runs the risk of choking off liquidity and creating volatility,making it harder for banks to manage genuine client currency needs.

It could also drive further currency trading to offshore markets such as Singapore via non-deliverable forwards,beyond the RBI’s reach. Non-deliverable forwards are a derivative instrument that allow investors to speculate on a currency’s movement without having to hold the currency.

“You are in this new environment where they say jump and you say how high. You don’t take them on,” a senior official at a large bank said.

The RBI did not have any immediate comment.

The sources,none of whom wanted to be identified discussing private conversations with the RBI,said the calls became more frequent around the second week of June,when the rupee started its steep descent that culminated in a record low of 60.76 against the dollar on June 26.

The RBI has called as often as 10 times a day,according to one of the sources,from around a couple of times a trading session during normal days. At times,the calls have gone beyond queries on flows and positions. “There were a couple of days they did more than that. They said ‘cut your positions’,” one of the sources said.

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