In a late evening notification on Wednesday, RBI said banks cannot offer NDF contracts involving rupee to resident or non-resident users. Banks and other authorised dealers have also not been permitted to rebook any foreign exchange derivative contract, whether deliverable or non-deliverable, which is cancelled with immediate effect.
“With this notification RBI is plugging a loop hole which had allowed banks also got into deals with their corporate customers to reduce their losses following the RBI direction limiting the net open rupee position to $100 million on Friday. It means that the premium between the local and NDF market will go up when market open tomorrow,” said a senior treasury official.
On Friday, the RBI had asked banks to cap their net open rupee positions in the onshore deliverable market to $100 million at the end of each business day effective April 10, far lower than the 25% of total capital limits allowed earlier. The central bank has so far no heeded to calls by bankers to soften the blow by implementing the new guidelines only to prospective trades. The latest change by RBI makes it more difficult for banks to prevent losses, bankers said.
“Banks can’t offer NDF or offshore products to clients now, and all the arbitrage trades that clients were doing because of the price difference between the two markets will no longer be possible. There’s also some ambiguity on related party and operational processes, but this is a big hit for bank and large corporates treasuries,” said Anshul Chandak, head of treasury at RBL Bank.
Banks have been barred from undertaking any foreign exchange derivative contract with their related parties too, effectively preventing them from palming off their losses to any related entities. The new norms are applicable with immediate effect, until further review, RBI said.
On Monday, the first day of trading after the RBI guidelines came on Friday, the difference between the one-month onshore forwards and one- month offshore NDF had risen to about Rs 1.35 in the early part of trade but later came down to about 40 paise as banks got into deals with their corporate clients to prevent losses.
The rupee which had opened sharply higher in the spot market touching a high of Rs 93.58 per dollar from Friday’s close of Rs 94.81 per dollar. However, year-end demand from companies and reluctance by banks to take a position after the RBI direction led to the rupee weakening to Rs 95.22 per dollar, an all-time low before ending at Rs 94.83 per dollar.