Due to the new rules of RBI, there was a strong comeback in the rupee. The ‘net open position’ limit for banks was set at $100 million, forcing them to sell excess dollars. Due to this, the rupee strengthened from 94.84 to 93.85.
Rupee has made a strong comeback after record breaking fall. After hitting its lowest level on Friday, the rupee witnessed a big rise in early trade today due to a sudden and tough decision by the Reserve Bank of India (RBI). As soon as the market opened today, the rupee rose by almost one percent to 93.85 against the dollar. Last Friday, the rupee had closed at its worst ever level of 94.84. From there it’s a straight increase of about one rupee.
RBI’s ‘masterstroke’
To reduce fluctuations in the foreign exchange market, the Reserve Bank has set a ‘net open position’ limit for banks at $100 million. This rule will be applicable at the end of every trading day. An order related to this was issued on Friday evening. RBI has made it clear that all banks will have to strictly follow this instruction till April 10. With this new rule, banks will not be able to deposit large amounts of dollars nor speculate in the foreign exchange market. Due to this, banks had to sell the extra dollars held with them in the market. As the supply of dollars increased in the market, the value of rupee suddenly increased. Economic experts believe that this step will help in preventing the rupee from falling in the coming days also.
What is ‘Open Position’?
Suppose a bank buys or sells a particular currency (such as dollars). But if no one makes a reverse deal (i.e. sell after buying or buy back after selling) to complete that deal, then it is called ‘Open Position’.
Long Position: When more currency is bought than sold.
Short Position: When more currency is sold than purchased.
‘Net’ open position
Banks handle hundreds of transactions a day. At the end of the day, the balance between the total currency they bought and the total currency they sold is called ‘Net Open Positions’.
What does the ‘$100 million’ limit mean?
This limit of the Reserve Bank means that no bank can have ‘open’ deals worth more than $100 million at the end of the day. That is, the total value of additional dollars available to the bank or available for sale cannot exceed this limit. If a bank has more money than this limit, it will have to balance it by buying or selling it in the market.