Thursday, December 15, 2011

RBI Lowers Net Open Position Limits for FX Dealers

The Reserve Bank finally did what was always feared. It has restricted the net end of day open positions and the intraday open positions that banks can carry.

The central bank has also restricted the extent to which importers and exporters can put in and out of dollars on the basis of their expected earnings, CNBC-TV18’s Latha Venkatesh reports.

This was expected by bankers for the past several weeks and today looks like somebody got wind of it because the dollar went as expensive as 54.29-54.30. Thereafter, yes, there was a stock market recovery, but the rupee quite clearly went all the way up to 53.70-53.60 and that strong finish appears to be that somebody has got wind that the Reserve Bank is planning something drastic and drastic indeed it is.

What it is basically telling is that until this moment, importers and exporters, on the basis of their past performance could get into forward contracts of buying the dollar and then selling it and then buying it and then selling it. Basically, one could cancel and rebook, and cancel and rebook. But, if you did it up to 75% of your eligible limit beyond that you had to take delivery. Up to 75%, you could cancel and rebook.

Now, that limit has been reduced to 25%. So you can still cancel and rebook, because it’s always possible that you took a decision to sell dollar but then you thought okay you took a wrong call so you bought it back and you sold it again. At the moment this moving in and out of dollars has been restricted to only up to 25% of your eligible limits.

Also for FIIs you could take a forward contract and cancel it only up to 10% of your exposures. Otherwise once you took a forward cover it was held on. You could of course roll it over after it matures because you still have open positions in the equity market. Now even that 10% of cancelling and rebooking is not allowed.

Once you got into a forward cover to hedge your exposure you stay put, there is no way you will be allowed to get out of it or punt on it. Basically you can’t punt on the rupee, that’s for importers, exporters, FIIs. As well all cash transactions and what you call cash spot and tom transactions that is transactions which are on a T plus one basis. You buy today and you have to deliver tomorrow.

Those kinds of transactions could also be cancelled and they could be cash settled. You bought the dollar, but you didn’t want to take the dollar, you would just take the difference in cash, in rupees. Now that is not allowed. If you are doing a spot transaction you have to take delivery. If you do it for transaction up to tomorrow or day after you have to take delivery.

So again punting in and out or just making money, speculating on the way of the rupee down that is not possible. So basically they are trying to squeeze out the speculative element.