RBI cautions foreign banks on speculative FX trades - report

Rupee notes are stapled to form a garland at a shop in Jammu December 2, 2011.

MUMBAI (Reuters) - The Reserve Bank of India has cautioned some large foreign banks for encouraging local companies to participate in speculative trades in the foreign exchange market, the Business Standard reported on Thursday.

The RBI, in a meeting with senior officials of foreign banks, cautioned them for taking part in these trades as it felt that the transactions were partly responsible for the sharp fall in the rupee against the dollar, the newspaper said, quoting three people familiar with the development.

The rupee has depreciated nearly 16 percent in 2011 against the U.S. dollar.

"RBI was aware that many foreign banks were encouraging speculation in the market. But it could not take any action as most of these trades were done offshore outside its regulatory purview. There was a meeting last month where RBI issued oral warning to some of these banks," a source privy to the discussions with the regulator, told the paper.

Most of these trades were done taking advantage of the difference between the forward premium rate in India and the offshore non-deliverable forward market rates, the report said.

The RBI, on December 15, reduced the net overnight open position limit (NOOPL) of authorised dealers in the foreign exchange market with immediate effect, potentially reducing capacity of market participants for taking trading positions.

(Writing by Aditya Phatak; Editing by Subhadip Sircar)