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4 days ago
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ARTICLE AD BOX
Summary
RBI’s sudden clampdown on banks’ dollar bets aims to steady a sliding rupee—but it has rattled lenders and markets alike. With macro pressures at work, forcing banks to unwind trades at a loss may do little to curb volatility. So, is it worthwhile?
Banks in India got a jolt late on Friday after the Reserve Bank of India (RBI) capped their net open positions in the forex market at $100 million. Many have been sitting on large long-dollar positions, which they’ll now be forced to unwind by RBI’s deadline at a loss. Bank stocks, of course, slid on Monday.
RBI’s apparent aim is to increase dollar supplies in support of the rupee. But the fact that it last used this measure in 2011 testifies to the exceptional nature of its action. To be sure, RBI has been selling dollars as its first response to the rupee’s slide. But a rapid drawdown of its reserves may have made it seek other options.
One reason for the rupee’s fall has been a surge in speculative bets in offshore markets, which drove a wedge with onshore rates, prompting banks in India to go long on the dollar to sell offshore.
RBI may have wanted to snap off a self-fulfilling cycle. But on Monday, the rupee’s early gains didn’t last and it touched yet another new low. After all, broad macroeconomic pressures are never easy to fight. Pushing banks into a tight spot with suddenly stiffened rules may not help all that much in reducing exchange-rate volatility. RBI might as well spare lenders the shock.
English (US) ·