Large Banks Push RBI to Reassess Forex Exposure Limits
Big banks urge RBI to rethink uniform forex exposure cap
The Economic Times
Image: The Economic Times
Large banks in India are urging the Reserve Bank of India (RBI) to reconsider its $100 million uniform limit on uncovered foreign currency exposure. They propose a dynamic regulation that ties the net open position (NOP) to a bank's size and transaction flows, suggesting that a one-size-fits-all approach is ineffective.
- 01Large banks are advocating for a review of the RBI's $100 million forex exposure cap.
- 02They suggest linking the net open position (NOP) to bank size and flows for more flexibility.
- 03The current limit was imposed to curb speculation against the Indian rupee.
- 04Banks have faced challenges in managing offshore hedging trades under the existing framework.
- 05The Indian Banks' Association is actively seeking feedback from its members regarding this issue.
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Large banks in India are urging the Reserve Bank of India (RBI) to reconsider its $100 million uniform limit on uncovered foreign currency exposure, known as the net open position (NOP). This limit was introduced when the Indian rupee faced significant pressure, aiming to curb speculation against the currency. However, bank officials argue that a blanket cap is ineffective and suggest a more dynamic regulation that adjusts the NOP based on a bank's size and transaction flows. The current rule restricts banks from using offshore hedging trades to offset their NOP, leading to complications in managing their foreign currency positions. As a result, banks have had to unwind offshore positions, incurring mark-to-market losses. The Indian Banks' Association is gathering input from its members to advocate for a potential review of this regulation once market volatility stabilizes.
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The current forex exposure cap may lead to increased costs for banks, which could indirectly affect lending rates for consumers and businesses.
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