During discussions on Saturday, March 28, banks requested to postpone an April 10 deadline to comply with the new regulations, which mandate the closure of a significant volume of positions. Those involved, preferring anonymity, indicated that unwinding to such an extent would lead to substantial losses and recommended that the new regulations target only fresh positions.
The Reserve Bank of India announced after market hours on Friday that banks acting as authorized dealers must limit their open positions in the onshore currency market to $100 million at the close of each trading day. Previously, they could establish open position limits within 25% of their capital.
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The speculative trades are primarily focused in the offshore non-deliverable forwards market, with a smaller portion in the futures market, involving the purchase of dollars onshore and subsequent sales abroad, sources disclosed.
The RBI has not yet responded to an email request for comment outside of business hours.
Onshore dollar purchases have placed stress on the rupee, which fell to a new low on Friday, dipping below the critical 94-per-dollar mark for the first time. Since the outbreak of war in Iran in late February, the currency has declined over 4% and is currently the worst performer in Asia this year, as soaring oil prices heighten concerns of inflation and a broader trade deficit for the import-dependent economy.
Banks will need to sell dollars in the onshore market to unwind their bets to adhere to the new rule, potentially resulting in a significant appreciation of the rupee when trading resumes on Monday, sources indicated. This scenario could adversely affect banks that have established short positions.
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Following the central bank’s decision, CR Forex Advisors now forecasts the rupee to fluctuate between 92.50 and 92.80 per dollar short-term, compared to Friday’s close of 94.8150.
Monday marks the final trading day of the current Indian fiscal year, as March 31 will be a public holiday.
