Why RBI’s $100 Million NOP Cap Failed to Steady the Rupee
Why in the news
A new flat limit on bank forex positions was announced on a Friday, but its support for the rupee proved short-lived. After a gain of over 1% at Monday’s open, the currency turned lower and crossed ₹95 to the dollar.
Key facts
| Item | Detail |
|---|---|
| New NOP limit | Flat $100 million, overriding the earlier norm |
| Earlier NOP limit | 25% of bank’s capital, a board-set internal cap |
| RBI dollar sales | Over $15 billion from reserves in first three weeks of March |
| RBI forward book | About $100 billion by March |
| Brent crude | Around $115 per barrel |
| Rupee level | Breached ₹95 per dollar |
Background concepts
- Net Open Position (NOP): gap between a bank’s foreign currency assets and liabilities; a long position means more dollar assets than liabilities, a bet on rupee weakness.
- Onshore market: USD/INR trades inside India under RBI regulation. Offshore market: mainly the NDF market in Singapore, London and Dubai, outside direct RBI control.
- Forward book: commitments to trade currency at a fixed rate on a future date.
- Balance of Payments (BoP): record of all transactions with the rest of the world, comprising the current account and the capital and financial account.
- Onshore-offshore gap: Indian banks usually run long positions onshore and short offshore, while foreign banks do the reverse.
- Importer demand: costly crude raises dollar purchases by oil importers, pressuring the rupee.
Why the cap fell short
- It is an administrative tool that tackles bank positioning, not the root causes.
- Three pressures remain: high crude ($115 a barrel), a worsening BoP and rising capital account outflows.
- Forcing banks to unwind onshore long positions can widen the onshore-offshore spread and strain liquidity.
- That can start a loop: liquidity strain lifts offshore premiums, dollar demand grows, and the rupee weakens further.
Concerns
- RBI has used reserve sales, forward operations and now the NOP cap, hinting that conventional options are thinning.
Exam angle
- NOP cap: flat $100 million replacing 25% of capital.
- NDF market centres: Singapore, London, Dubai.
- BoP parts: current account plus capital and financial account.