The Indian rupee opened sharply stronger on Monday (March 30), gaining 1.22 paise to trade at 93.59 per dollar compared with Friday’s close of 94.81, as banks began unwinding arbitrage positions in line with the Reserve Bank of India’s latest move.
Khara said the RBI’s intent is to ensure that currency exposures remain within manageable limits and do not pose risks to bank balance sheets. He explained that while proprietary trades can deliver short-term gains, excessive speculative positioning can destabilise markets over time.
Drawing parallels with similar measures in 2011, Khara noted that the central bank’s action reflects concerns over the sharp and rapid depreciation seen in the rupee in recent weeks.
Abizer Diwanji pointed out that even if overall net exposures were controlled, onshore positions may have expanded due to arbitrage between domestic markets and offshore non-deliverable forward (NDF) markets. He added that persistent dollar outflows—driven by imports, equity market trends, and global factors—likely led banks to build short positions domestically while hedging overseas, creating pressure on the rupee.
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These are edited excerpts from the conversation.
Q: This was a very profitable sort of venture for banks. Could you tell us, do the numbers seem very large to you, $40 billion a huge number?
Khara: When it comes to this kind of a guidelines, which has come from RBI, I would say that perhaps it is intended with the intention to ensure that the risk remained contained and it should not go beyond the limits. With that in mind, the kind of volatility which was seen in the currency market essentially attributed to some banks having huge open positions, and they were playing on the speculative trade in the market. It is essentially to curb that, because speculative trade generates profits in the short term, but in the long term, it can impact the stability of the institution also. With that in mind, perhaps survey has come out with these guidelines.
When I looked into this, it was reminded me of the year 2011 where we had seen similar kind of currency movements. And at that point of time, I we had put condition that it should not exceed 15% of the of the capital. In fact, then onwards, the boards are given their discretion by the by RBI to lay down the limits for this kind of a currency trade.
But yes, of course, there are certain large banks who actually operate on the proprietary book. The intention of the net open position is essentially to ensure that the bank should be in position to serve their customers well and without really impacting their balance sheet.
Q: In your experience, this would happen and I was told this that the RBI would give some time. They’d call up banks and say, wind this down, and it won’t be without any warning, not a circular so that’s one thing I heard. Any thoughts?
Khara: The kind of rupee volatility, which we are seeing for last couple of days, almost a month now, was essentially, perhaps the reason why maybe the moral suasion was something which would not have worked. That is the reason why RBI has come out with such kind of a step. They have done it in the past, also sometime in 2011 also, as I mentioned, this kind of a step was taken. But yes, of course, they very closely monitor the orderly movement in the markets.
Q: How will banks book this? There will be a loss which will have to be booked?
Khara: They will have to go for the MTM (mark to market), because $500 million their limit, if at all, when some banks are holding that kind of a limit, they will have to pare it down $100 million and $100 million has to be done by April 10, as per the guidelines.
So, what will happen is that slowly and gradually, they will unwind their position. My expectation is that almost about $18 billion, odd would be the amount which should be available for unwinding and perhaps it will lead to almost about 100 paisa strengthening of the rupee this is what my expectation is.
Q: When you were the MD of State Bank of India, was the net open position by the bank, do you think similar, or the industry similar to $18 billion or do you think it’s gone up now, in the recent past?
Khara: It would have gone up. Many of the foreign banks are very active in this particular space. In fact, when we were proving the limits within the board level, we are very mindful that we were never having intention of the speculative gains. Intention was more in terms of ensuring that we should be efficient to meet the customers’ requirements.
Also, those were the days when, when the volatility was not at well. Now it has gone up significantly I would say in about a month’s time, rupee has depreciated almost what 4%, it’s a very significant number. Normally, we had seen about 4% depreciation in a year, but now we have seen rupee depreciation of 4% in a month. So that needs to be crubed.
Q: What do you make of RBI’s move? If I look at it in this fiscal itself, the currency depreciation has been close to 10% which is the highest you’ve seen in more than 10 years. What do you make of the move that the RBI has done and have you done any rough math in terms of the open positions?
Diwanji: I would agree with Mr. Khara that it’s around ₹18-20 billion of open positions, most of it large Indian or foreign banks, because none of the other boards would approve limits, which are significantly large. But, just dissect the situation.
First of all, this circular says this is only for net open positions onshore. Now that’s very important to understand, because banks may not have necessarily taken net open positions overall, because what they would do is they would short in the domestic market speculatively, but cover in the NDF market, which is the non-deliverable forward, which is a market that exists for Indian rupee, dollar overseas to be settled in dollars.
So ideally, the bank’s net open positions overall may have been under control, but onshore would have been exceeded. Now, why onshore would have been exceeded? Because of the systemic dollar outflows that are happening in India, be it stock market, be it importers, be it whatever, because of the rising oil bill or the falling stock markets, all those things, there is pressure.
Because of the actual flows, what you would try and do short positions domestically and try and cover them in in the NDF market. So, banks are not impacted, because these are kind of ready forward transactions.
But what really happens is now, when you have to regulatory bring the position down to $100 million there will be a contraction of the gap in the NDF market and the rupee market. Plus, domestically, because you’ll have to cover positions the domestic rupee, as Mr. Khara also said, will improve significantly. So as a result of this movement, because of regulatory intervention, banks will have to book a loss.
Q: After today’s one-rupee appreciation, do you think it will hold? So if rupee goes to about 93.50 to a dollar this morning, do you think it will hold there for sometime?
Khara: My sense is that if the speculative players are not all that active, and also the trend as far as inflows of dollar continues, then it has to be essentially a balance between the inflow and outflow. In the current scenario, my sense is that it should help in holding it around the same levels.
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