Banks ask RBI for 3 months to comply with FX position caps: Sources

The rules could force a sudden unwinding of arbitrage ‌trades between the non-deliverable forward (NDF) and onshore markets, leaving ‌banks exposed to potential losses on those trades, ‌according to the sources.

Lenders have urged the Indian central bank to grant three months for compliance with new foreign exchange position limits, noting that a quick implementation could ⁠trigger disorderly unwinding of positions and potential losses, six bankers told ⁠Reuters.

The Reserve Bank of India said after ‌the market close ​on Friday that banks must ensure that by April 10 their net open rupee positions in the onshore deliverable market do not exceed $100 million at the end of each business day.

The ​decision to impose limits ⁠on onshore positions comes against a backdrop of mounting pressure on the rupee, spurred by an oil price surge and heavy foreign portfolio outflows following the start of the ⁠Iran war.

Following ‌the notification of the new rules, however, senior treasury officials from both local and foreign banks ‌met with central bank officials to convey their concerns, the bankers, who did ⁠not wish to be identified, said.

The rules could force a sudden unwinding of arbitrage ‌trades between the non-deliverable forward (NDF) and onshore markets, leaving ‌banks exposed to potential losses on those trades, ‌they said.

An extension of the timeline could alleviate the ‌stress by allowing banks to simply let such positions mature as opposed to rushing to unwind them, two of the bankers said.

One of the ⁠bankers explained ⁠that since most of the arbitrage positions are clustered in the 1-3 month bucket, an extension would allow them time to mature and prevent "one-sided panic."

In addition to the extension, bankers have also proposed that the RBI allow them to maintain existing positions until they mature, the bankers said.

A spokesperson for ​the RBI did not immediately respond to an email seeking ​comment.

The rupee hit an ​all-time low of 94.84 per U.S. dollar on Friday and is down over ​5% year-to-date.