RBI's NOP move: INR and banks' playbook by Emkay Global Financial Services Ltd
RBI's NOP move: INR and banks' playbook
* INR has been a tailspin, taking another 5%+ hit so far this CY – RBI seems to be done with the direct sale of Dollars in spot/Forward, with their forward book already in excess of $100bn and in significant MTM losses.
In this backdrop, RBI announced a new measure (taking leaf from the paybook they used 15 years ago) – “curbing the banks’ ability to bet against the INR” .
* RBI announced strict caps on the Net Open Positions (NOP) of Banks in FX – this limit is set at $100mn (effective from April 10th). This limit was earlier defined by the Banks’ Boards (as a % of their Tier Capital) and by imposing strict limits, RBI is effectively telling banks that they cannot use their Balance Sheet to speculate on further INR Depreciation!
How it can impact Banks+ INR :
* On papers, It severely limits banks’ fee and treasury income from currency trading. May make hedging very expensive, widening the spreads.
Media reports had indicated that banks are currently sitting with $40bn of open positions.
* We argue it looks very large, frankly and UNLIKELY that banks would be sitting with such high speculative net open positions, esp. in the midst of the War where the binary outcome risk has been very high.
Even if they have, banks have been apparently daily persuaded to bring it down by the RBI - daily information is being collated by the same authority. but if it to be true that could be serious unwinding and banks would be exposed to material MTM losses in near term !
* The aim of the circular is probably to tell the markets at large that they are "closely" monitoring - Nothing to impact the markets materially.
* This explains why INR hasn’t gained much grounds today, partly reflecting this as more of posturing by RBI to discourage speculative position and FX arbitrage amid relatively low overnight domestic rates.
* We don’t think the policy intent is to change the fundamental direction of INR either, which is bearing the brunt of adverse ToT and “capital account drought”, but to ensure speculative bets, onshore and offshore don’t overplay the INR move.
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