Net Open Position Cap: RBI Curbs Banks’ Forex Arbitrage
Why in the news
To steady a rupee that had slid 4% in March amid the West Asia conflict, the central bank ordered banks to wind down speculative currency positions. The resulting dollar sales pulled the rupee back under 93 per dollar.
Key facts
- Measure: hard cap on Net Open Position (NOP) of $100 million per bank.
- Deadline for selling excess holdings: April 10.
- Impact: about 75% of arbitrage positions closed; $30 billion out of an estimated $40 billion of short-rupee bets squared off.
- Rupee: from over 93 to 92.99 per dollar.
- Bond yields: flat at 7.05% before the Monetary Policy Committee (MPC) decision.
| Item | Earlier | Now |
|---|---|---|
| NOP limit | Linked to a bank’s capital, so big banks could hold billions | Flat $100 million per bank |
| Short-rupee bets | About $40 billion | About $10 billion left after $30 billion unwound |
Background
- Currency arbitrage: buying in one market and selling in another to gain from a price gap. Here banks borrowed rupees at cheaper domestic rates and bought dollars, effectively wagering on a weaker rupee.
- NOP: the part of a bank’s foreign-currency holdings that is not hedged or balanced.
- Unwinding: banks sell dollars and buy rupees, raising demand for the rupee and strengthening it.
Policy mood
- Traders were torn between the Iran conflict and the Finance Minister’s hint that the RBI had scope to cut rates.
- Her accommodative tone led markets to expect a less hawkish RBI statement.
Exam angle
- Numbers: $100 million cap, April 10 deadline, 92.99 per dollar, 7.05% yield.
- Related terms: NOP, squaring off, arbitrage, hawkish stance.
- Core topic for RBI Grade B forex management and banking exams.