Commerzbank’s Charlie Lay explains that the Reserve Bank of India (RBI) has capped banks’ net open Indian Rupee (INR) positions at USD 100 million per day to curb speculation and volatility. With outstanding long Dollar (USD) positions estimated at USD 30–40 billion, forced unwinding is expected to push USD/INR lower, potentially towards 92.00, though high Oil prices may limit Rupee gains.

Position caps force USD selling in India

“In a short statement last Friday, the Reserve Bank of India (RBI) announced that banks must cap their net open rupee positions (NOP-INR) at USD100mn at the end of each business day. NOP refers to the bank’s aggregate currency exposure i.e. net of all their long and short positions across spot, forwards, and options in INR.”

“There are estimates that aggregate outstanding long USD positions across banks could be between USD30-40bn. It is also unclear how much of this is distributed across the banks which will determine the extent of unwinding in the long USD positions.”

“The net effect is that USD/INR is expected to drop as banks are forced to unwind long USD positions in the onshore market, particularly those linked to the non-deliverable forward-onshore arbitrage. The question is how aggressive it will be and how much it will fall.”

“RBI is not intervening directly in the FX market, but instead it is forcing banks to sell USD. USD/INR closed at a record high of just below 95.00 last Friday. We could see a slide towards the 92.00 level in the next week or so but as long as oil prices remain high, USD/INR will likely remain supported.”

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