Banks scramble to meet RBI’s forex deadline, expect curbs to last months

Banks rushed to settle their foreign exchange positions ahead of Friday’s deadline set by the Reserve Bank of India (RBI), five treasury officials told Mint. Despite the new net open position (NOP) restrictions being framed as temporary, bankers expect these curbs to remain in place for several months.On 27 March, the RBI capped banks’ NOPs in the domestic market at $100 million at the end of each business day, and mandated that banks comply with this rule by 10 April.

In banking and foreign exchange, an NOP is the difference between a bank's total assets and total liabilities in a specific foreign currency (like the US dollar). It measures a bank's unhedged exposure to exchange rate fluctuations.“Our bank does not have exposure to NDF (non-deliverable forward) transactions, while some peer banks have unwound their open positions,” said VRC Reddy, treasury head at Karur Vysya Bank.According to bank treasury officials, lenders have complied with the directive by cutting their exposures, though the adjustment has come with costs and disruptions to established trading strategies.

“We have unwound our positions and we report that data to the RBI,” a senior treasury official at a private sector bank said.The unwinding has weighed on banks’ profitability. The forex derivative market is dominated by larger banks with gross onshore positions of $30-40 billion that offset each other, a 29 March Jefferies report said.

Banks often buy dollar forwards cheaply in India and sell them at a premium abroad, keeping risks balanced on paper while profiting from the difference.The central bank’s move was aimed at checking speculative build-up and arbitrage between the offshore NDF market and the onshore forwards market. Since the NOP