RBI Imposes $100 Million Cap on Net Open Positions for USD/INR Currency Pair

Reserve Bank of India Introduces New Currency Volatility Measure

On March 27, the Reserve Bank of India (RBI) announced a new directive for all banks to limit their net open position on the Indian currency (NOP-INR) in the onshore deliverable market to $100 million at the end of each business day. This move is an unusual measure by the central bank, signaling growing concern over currency volatility.

Key Details:

• The new directive aims to remove speculative long dollar positions by banks and limit sharp gap-down openings of the rupee.
• All authorised forex dealers are required to comply with the new directive by April 10.
• The RBI has taken cognisance of the currency's recent slide, driven by the surge in Brent crude prices following the war in West Asia.
• Since the conflict began in late February, the currency has lost nearly 4%. In the current financial year, the rupee has depreciated more than 10%, making it the worst drop since 2011-2012.

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Market Impact:

• On Friday, the rupee touched a fresh record of Rs 94.84 to the dollar, with the rupee hitting all-time lows at least 5 out of the last 10 trading sessions.
• A move towards the psychological Rs 95 per dollar seems imminent, following foreign investors' record outflow from Indian assets in the last few sessions.

Regulatory Background:

• NOP-INR refers to the Net Open Position in Indian Rupees, a regulatory measure usually taken by the RBI to curb excess volatility in the currency.
• According to existing guidelines, authorised dealers can set their NOP approved by their board, provided these limits do not exceed 25% of the firm's total capital.

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