On March 27, RBI capped banks’ total open currency positions at $100 million and asked them to unwind excess exposure by April 10. Following the move, the rupee opened stronger on Monday, March 30, at 93.58 against the dollar, compared with 94.8 in the previous session, as banks began trimming positions.
Mehta estimates that around $30 billion of positions may need to be unwound by early April, with the process likely to keep volatility elevated in the near term. However, Mehta believes the risk of extreme dislocation has eased, with the rupee expected to trade within a more stable band going forward.
These are edited excerpts from the interview.
Q: There’s a 1% appreciation in the rupee, as expected. Will this hold? Is ₹93.60 the new normal?
A: We still have outflows, but this will make RBI intervention more effective. Earlier, arbitrage between onshore and offshore markets meant that intervention flows, in addition to normal trade and outflows, were also going to offshore traders. That bridge will now be broken, which is required since we are not a convertible currency.
Watch the full conversation here
The difference between onshore and offshore rates has been large, which is expected. It went up to ₹1 and is now around ₹0.80. It will play out over the next few days. The gap may remain wider, eventually settling around ₹0.40–₹0.50 as before. The fear was that it could widen to ₹1.5–₹2, but that has not happened. That is positive for unwinding.
Q: What would be the overall unwind required right now?
A: We have time until April 10. There is representation to let it expire, but we don’t know what the RBI will decide. From now until then, long onshore positions will have to be sold, and short offshore positions covered, depending on expiries.
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The timing is unclear as the RBI has asked for some relief. Estimates for net open positions range from $20 billion to $40 billion. A safer estimate is around $30 billion, as this is not public data and is based on market estimates.
Q: Do you think the reprieve we’re seeing is temporary?
A: The unwinding will happen. Offshore and onshore will trade within ₹0.50. We are still not out of the woods, especially with oil-related risks, but RBI intervention will be more effective.
The circular came on Friday evening when offshore markets were still trading, so some positions would have been covered, depending on liquidity. The move was not dramatic, and awareness was limited. Some participants adjusted partially.
After three days, the gap widened to ₹1.20 and has now come down below ₹1. The onshore-offshore gap continues to adjust with the evolving situation.
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