The Reserve Bank of India Tightens Grip to Reduce Speculation

The Reserve Bank of India has cut banks’ net open position limits in currency trading by as much as 75% for some, and at least by half for most of the top traders, in its attempt to end speculation on the rupee.

RBI on December 15 unleashed a series of measures to halt the downward trend of the rupee, including taking powers from the board to determine the overnight position, the net overnight dollar position a bank can hold, to save the rupee from falling steeply. It also took off the flexibility to cancel or rebook the forward contracts.

Hedging based on past three-year average imports was cut to 25%, from 75% making them deliverable. The domestic currency which has fallen about 20% this year, recovered from its lows of 54.20 after these measures, but has since started sliding again. It ended at 52.87/88 on Tuesday.

 While the central bank’s move has halted the sharp slide in the currency value, it could dry up liquidity in the currency market and reduce the earnings of many banks that have been benefitting from rupee volatility. Not only has the rupee been volatile but it has lost a significant portion of its value this year, causing a rippling effect throughout the economy. Importers and Exporters are finding great difficulty in getting the needed capital while the banks are revaluing their loans and forcing payments.

Opportunity has been curtailed; banks running proprietary positions will obviously take a hit on their other income. To that extent, banks’ trading income will come down. Also, interbank-volumes will start thinning. But the hedging activities of the corporations may not be hurt since the central bank has said the overnight positions could be breached, if it is for a client. The open position for some large banks which was about Rs 100 crore has been slashed to about Rs 50 crore.

The central bank has clarified that a bank could exceed policy if it is on account of a particular customer transaction.

The Central Bank has taken a hard-line to control the falling value of the rupee, speculation and inflation.

India’s recently booming economy is facing a global slowdown due to reduced consumer demand because of the global economic situation. India’s booming gold industry has also taken a hit with the rise in the cost of gold and locally, retailers are facing difficult times as manufacturers, and exporters are reducing staff.