Foreign Currency

Controversial RBI Action in Currency Markets Raises Eyebrows. Did it Unduly Benefit a Select Few?


Traders were shocked and baffled by Reserve Bank of India (RBI)’s action on April 4, 2024 when it brought down the curtains on foreign currency derivative trading which had grown hugely with a daily turnover of around $5 billion.

RBI’s action on April 4 evening, after the market closure, was equally shocking and baffling. No one knows why the RBI took the drastic action to virtually shut a market which existed since 2008. What was the provocation for the timing of the action is still a matter of speculation. It was something not above board. It also reeked of something murky in the way it was done . And it spelt the end for myriad professionals engaged by the various brokers as their services were no longer required in the currency derivatives market. They went home looking at the immediate prospect of unemployment.

To recap, on August 29, 2008, NSE opened its foreign exchange (forex) currency derivate trading platform, following SEBI’s permission to do so. This platform, through brokers registered with NSE, allowed individual traders to trade in a few forex pairs with rupee as the base currency. Although RBI in its circulars had stated that trades in forex should have an underlying exposure (through export or import etc.), at no time did NSE put up a warning on its platform (neither did it ask the brokers to do so) that traders should have an underlying exposure.

Trading in currency derivatives flourished, and subsequently RBI allowed individual traders to keep open positions of up to $10 million, which was later increased to $100 million, which further enthused the traders. RBI also stated, in its circulars, that there was no requirement on the part of traders to produce any documentary evidence of any underlying exposure, however, should the exchange ask for such evidence later, users should produce them. Daily trading volumes shot up and in recent months’ volumes touched $5 billion per day, a huge amount in the Indian context. While RBI was legally safe, having included in its circulars the point that this facility was meant for users with underlying exposure, NSE and other exchanges at no time warned the clients about the FEMA issue. It is surprising that the RBI allowed such trades over a period of more than 10 years without taking any action. RBI would have been aware that over 85/90% of the trades did not have any underlying exposure. They would have been aware that any large exporter or importers would not trade in the currency derivative market as they would have to provide cash margin (Rs 2,000 per lot; a lot is $1000 in value term) apart from paying the brokerage fee, which in earlier stages was significantly higher than equity trading fee.

On January 5, 2024, the RBI issued a Master Circular collating all the previous circulars relating to exchange traded currency derivatives, mentioning that this would be implemented from April 5, 2024. As this was in line with what was stated in earlier circulars, trading continued unabated. All hell broke loose at the beginning of April, when responding to a query from the Commodities Brokers Association about whether trades would continue after April 4 as before, a senior RBI official responded in a letter dated March 28 by stating inter-alia that “if any user is undertaking ETCD contract involving INR without an underlying exposure, the user is not in compliance with the provisions of FEMA”. The mere mention of FEMA sent brokers into a frenzy and when forex markets opened on April 2, they asked their retail clients to cut all positions, adding that they would be forced to cut any open position still left before the market closed at 5 pm on April 4. Open positions which totalled around 7 mio odd were brought down to just over 2 mio at the end of 4th May. Surprisingly and shockingly, RBI issued a circular after 5 pm on April 4, delaying the implementation of the circular to May 3. By this time, over 99% of retail traders had cut or were forced to cut their positions. The only beneficiary of the delay were traders who kept their positions open. These traders are now able to square off their positions till May 3, by which time the prices are expected to come down to their average prices.

What was even more shocking was that during the press conference following the Monetary Policy Committee meeting on April 5, and in front of a large number journalists, the RBI governor stated that the RBI had delayed the implementation at the request of some participants. The fact that these participants were openly violating the FEMA rules, as explained in RBI official’s letter of March 28, and that RBI was permitting such violations to continue for another month, was not explained. I have a few simple questions to ask.

1. Will RBI reveal the name “participants” on whose request the RBI agreed to delay the implementation of the circular? Wasn’t RBI aware that they were in violation of FEMA (as traders who had an underlying exposure would not be impacted by this circular)? And is it normal procedure for RBI to delay implementation of a circular released three months earlier at the request of any “participant”?

2. What was RBI’s motivation in shutting down such an active market which was operating smoothly?

3. Will SEBI reveal the names of the traders who still had open positions at close April 4 and who were the brokers who allowed these traders to continue to hold the open positions?

4. Will SEBI force these “privileged” traders to pay up the loss/return the profit if their positions were closed on the basis of closing rates of April 4?

5. Was there a quid-pro-quo in all this? Was the RBI influenced by its political masters?

In my 48 years of being involved as a forex trader in the State Bank of India (in India and overseas office) and two top global banks in markets ranging from the Far East, through India and the Middle East and Europe, I have never seen a central bank act this way.

A final parting thought – the fact that RBI has still not issued a press note on this shows their disdain for the “ordinary” traders and general public. Who are they protecting?

Aloke Nandi is a former SBI officer and an expert forex market analyst.



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