Reserve Bank of India partially lifted Curbs on Banks’ Foreign Exchange Transactions

The Reserve Bank of India partially lifted the curbs on banks’ foreign exchange transactions which it had imposed in December 2011. Several banks, including large lenders such as State Bank of India, ICICI Bank, HDFC Bank and Axis Bank and some public sector institutions were allowed to run higher net overnight open positions (NOP) in foreign exchange. The revised NOP caps are however still way below the earlier limits banks enjoyed before the restrictions were imposed in December 2011.

Banks use the open position limits to carry out proprietary trades or buy and sell dollars to meet requirements of corporate clients. The open position limits differ from lender to lender depending on the size and level of treasury activity. Open positions also help banks meet customer needs.

Banks usually buy some dollars on a given day to arrange funds for a corporate that has to pay for its imports the next day. The dollar bought captured under NOP lowers the cost and ensure availability of foreign exchange. Similarly, for a corporate looking to convert its dollar external commercial borrowings into rupees, the bank sell some dollars to other banks so the client can be offered a competitive conversion price.

However as the rupee turned volatile, many banks used their respective net overnight open positions to short the Indian currency, which further pulled it down. Also, foreign banks were found to cut arbitrage deals between the onshore market and the offshore dollar-rupee market, better known as the non-deliverable forward (NDF) market.

The RBI curb & Rupee Depreciation

When the RBI brought in the curbs, a uniform limit of Rs 50 crore was imposed on all banks. It must be noted that though the central bank has selectively raised the NOPs for many banks in the other restrictions on forex transactions have not been lifted.
The ban on corporates and FIIs betting on dollar by buying dollar forward, selling it and then again buying it back will continue. Also, corporates will have to take or give delivery of most of the dollars they buy or sell.

The rupee had fallen 18.7% between 5 August 2011 when rating agency Standard & Poor’s downgraded the sovereign rating of the US, and 31 December 2011. The sharp fall in the rupee against the dollar in 2011 had prompted the RBI to impose restrictions on speculative trading by reducing the net overnight open position limit of banks.


The rupee had touched an all-time low of 54.30 to the dollar in December 2011. However, the rupee did manage to rise 7.45 percent gain in January 2012 after dropping 16 percent in 2011, when it was Asia's worst performing currency.