Net Open Rupee Position is the overnight unhedged exposure held by a bank in India.Before RBI’s diktat, banks used to calculate their open positions after netting off their hedged bets in the overseas non-deliverable forward (NDF) market. For example, a $10 million purchase in India could be hedged by selling dollars in the NDF market in the future, which meant the bank in question had no open position to speak of. With the RBI putting a $100 million daily cap for overnight onshore deliverable rupee positions, banks will no longer be able to net off these trades with the offshore NDF effectively winding down the overseas trades.
Why did the RBI do this?
To check the rupee’s fall that is down nearly 10% in this fiscal year falling to an all-time low of ₹94.81 per dollar on Friday. Putting a daily cap on net open positions will force banks to reduce their dollar holdings and sell the US currency, providing a fillip to the rupee.
What impact will it have on the rupee?High crude oil prices and persistent foreign fund outflows have sent the rupee tumbling this year. The RBI move is to curtail speculative positions against the rupee that put excessive pressure on the currency. Expectations are that these measures, along with regular RBI interventions, could lead to the rupee gaining against the dollar.What does it mean for banks?
Estimates are that banks have taken hedging positions of anything from $20 billion to $40 billion against their domestic exposures. These will have to be unwound to reflect the new net open onshore deliverable position imposed by the RBI. Banks will have to take big mark to market losses on their onshore and offshore exposures as the spreads between onshore and offshore are expected to widen materially on account of a large potential unwinding. All this on the last two days of the financial year is not good news for banks.
Has this been done for the first time?
No. In December 2011, RBI had cut banks’ open positions on the rupee by up to 75% for some banks to reduce speculation on the rupee. It took over the powers of the board to determine the overnight position. It also took away the flexibility of banks to cancel or rebook forward contracts. The measures had helped the rupee recover some losses after sliding for most of the year.