RBI cracks down on forex speculative trading: sources

MUMBAI Tue Jul 2, 2013 6:14pm IST

Related Topics

Border Security Force (BSF) soldiers ride their camels as they rehearse for the "Beating the Retreat" ceremony in New Delhi January 27, 2015. REUTERS/Ahmad Masood

"Beating The Retreat" Rehearsals

Rehearsals are on for "Beating the Retreat" ceremony which symbolises retreat after a day on the battlefield, and marks the official end of the Republic Day celebrations.  Slideshow 

MUMBAI (Reuters) - 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 told Reuters.

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 decline was sparked by fears of an early end to the U.S. stimulus measures that hit most currencies, but the rupee was among the worst performers as the country's current account deficit hit a record high of 4.8 percent of gross domestic product in the fiscal year ended in March.

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.

India does not have data on net open positions, but multiple traders have told Reuters that banks had reduced their net open positions as a result of the RBI's requests.

In prodding banks to cut their speculative trading, the RBI is likely to be aiming to make its thus-far mild interventions more effective, traders said. With less liquidity, any dollar sale by the central bank would have a bigger market impact. Fewer open positions also make it harder to short the rupee.

The covert supervision of currencies reflects the RBI's longstanding caution when it comes to explicitly imposing measures. The last time it imposed outright curbs on net open positions was during a rupee plunge in late 2011.

Late in June, after stepping up its monitoring, the RBI mandated foreign banks limit themselves to placing hedging-related trades on onshore forward markets on behalf of overseas clients and not use existing client positions to make other trades, such as for proprietary trading.

The RBI's active management of currency markets comes as offshore trading of rupee forwards, especially in Singapore, is on the rise.

Daily average turnover in the offshore non-deliverable forward markets is estimated to have grown to between $4-$4.5 billion, according to HSBC's 2013 Emerging Market Currency Guide, higher than its estimate of India's onshore forwards volumes of $3 billion.

Futures, which trade on exchanges, reach around $5-6 billion average daily.

"Some people will obviously find it easier to go to the NDF market rather than deal with the constraints here. So in some sense you drive away business from onshore to offshore," said one of the sources.

(Reporting by Rafael Nam, Suvashree DeyChoudhury, Subhadip Sircar, and Archana Narayanan in MUMBAI; Additional reporting by Rachel Armstrong in SINGAPORE and Saikat Chatterjee in HONG KONG; Editing by Tony Munroe and Sanjeev Miglani)


After wave of QE, onus shifts to leaders to boost economy

DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.

Reuters Showcase

Vodafone Ruling

Vodafone Ruling

Government will not appeal Vodafone tax ruling   Full Article 

Indian Railways

Indian Railways

Private refiners compete with state firm to sell diesel to railways   Full Article 

Ranbaxy Results

Ranbaxy Results

Dec-quarter net loss widens on forex loss  Full Article 

Market Eye

Market Eye

Sensex, Nifty retreat from record highs on profit-taking.  Full Article 

Tech Talk

Tech Talk

Apple takes high road in China smartphone standoff with Xiaomi.  Full Article 

Business Strategy

Business Strategy

Uber scraps commissions for its New Delhi taxis.  Full Article 

Job Cuts

Job Cuts

Sony to cut 1,000 jobs in smartphone business - sources.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage