Mumbai: After its recent intervention in the exchange-traded currency futures markets, the Reserve BaÂnk of India (RBI) seems to be wanting more control over the market to check rupee volatility.
According to sources, the RBI has asked market regulator SEBI to hike position limit for three public sector banks trading on its behalf in currency futures. The central bank has written to the Securities Exchange Board of India (SEBI) to relax the limits so that its select banks’ collective open interest can be 50 per cent, up from the current limit of 15 per cent. The collective position limits of these three banks would allow RBI to assume at least 50 per cent of the open interest in the USD/INR exchange traded derivatives.
Market participants feÂar if these banks get controls of at least 50 per cent of the market then that would heavily influence the price in a big way. While such intervention is done by a few central banks across the world, here it translates into breach of rules set by the capital markets regulator.
“If position limits are to be increased, it makes sense that the limits are increased across the boÂard. The market participants should not be favoured or discriminated based on their closeness with RBI or on whims-and-fancies of the RBI. The bank I work for is a private bank and therefore do not qualify to be in the 'good books' of RBI for such currency market intervention.” a forex trader said on condition of anonymity.
A bank at present can take approximately $500-600 million positions at NSE amounting to 15 per cent of open interest on NSE. Members of the Forex Association of India refused to comment.
“There are various rules that the RBI and its select banks are violating. For example, the select banks of RBI are violating asset segregation rules of SEBI, that were also recommended by International Organisation of Securities Commissions (IOSCO) in form of Principles for Financial Market Infrastructures (PFMI),” said a source.
“According to the rules, a broker should not take positions on behalf of a third party in its account and its funds and positions should be handled differently from the funds and positions of other entities. What the select banks are doing for RBI is a clear violation of the rules as they are trading on behalf of RBI under the garb of the proprietary trading,” said the source.
Responding to the charges, an RBI spokesperson said, “The RBI intervenes in the market to maintain orderly conditions. As is the normal practice, the other regulators are taken on board in regard to any action which impinges on any rules/ regulations/ guidelines issued by them.”
However, the RBI spokesperson did not answer questions on relaxation on position limits sought by the central bank from SEBI. Last month an RBI official, who is closely involved with the RBI's market operations, had admitted that the RBI is intervening in the rupee currency futures market. The senior central bank official made the comment at a workshop for about 40 trainees from trading rooms at banks, according to news reports.
On December 9, ahead of the US Federal Reserve meeting, the RBI said that it would intervene in the exchange-traded currency derivatives (ETCD) markets, if required. It would do so in addition to its regular intervention in the spot and forwards market. If such a scenario emerges in equity and equity derivatives market, SEBI would usually penalise the entity that corners the market and have such a large influence on the price formation on the pretext of creating artificial market, sources said.
Even from the perspective of fair competition, the scenario is not conducive for competition as it allows an entity (in this case RBI) to have abusive market power, they said, adding that not only Sebi, CCI should also worry about the effects of such move on the competitive forces in the currency derivatives exchange market and on the growth of the market.
They further said participation of RBI in the currency derivatives segments of the exchange per se may not be an issue; the issue is unfair rules that may be created to favour RBI's entities. ETCDs include currency futures and options where four pairs get traded: rupee-dollar, rupee-yen, rupee-pound and rupee-euro.Typically, these markets are being used for hedging. RBI's intervention in the currency market is through public sector banks.
While it regularly intervenes in the forwards market to rein in volatility in the exchange rate, it had kept off the exchange-traded market. “The Reserve Bank of India intervenes in the domestic foreign exchange market when required to manage excessive volatility and to maintain orderly conditions in the market. As a further measure, it has been decided to intervene in the ETCD segment, if required,” the central bank said on its website.
Not many central banks in the world intervene in exchange traded markets. Brazil's central bank has an official stance on intervening in the futures market. A few Asian central banks, mainly China's and South Korea's, do such intervention occasionally but the derivatives markets there are deep. With the announcement, RBI joins the rank of the rare central banks to accept intervention in the futures market as one of its exchange rate management tools. Its officials, including governors, have acknowledged several times that the central bank regularly intervenes in the over-the-counter currency market, not for defending any currency level but to iron out volatility.
The central bank said it would be releasing the data on such intervention in its monthly bulletin, where it already provides data on purchase and sale of dollars in the forwards market.
“World over, central banks have been free to intervene in the market. Law has rules and the RBI intervening could be breach of rules but not the law and I don’t think the spirit is getting violated. The spirit is to curb too much volatility in the market as it impacts importers or exporters. RBI doesn’t have a desired rate nor is its intention commercial but just economic stability. Certain areas should be left to the regulator,” said a source.
Download the all new Deccan Chronicle app for Android and iOS to stay up-to-date with latest headlines and news stories in politics, entertainment, sports, technology, business and much more from India and around the world.
