RBI's forex norm tightening to pressure bank earnings: Jefferies

The RBI has tightened forex exposure norms for banks, capping net open positions at USD 100m. A Jefferies report warns this could cause near-term earnings pressure and MTM losses, though regulatory forbearance is expected to soften the blow.

The Reserve Bank of India's recent move to tighten forex exposure norms for banks could lead to near-term earnings pressure, even as the Street expects some regulatory forbearance, according to a report by Jefferies. The brokerage noted that "in a surprise move, RBI has capped banks' net open position (NOP) in onshore forex market to USD 100m vs. board-driven limit within 25% of capital," a step seen as a response to "sharp depreciation of INR & wider spread between offshore (NDF) & onshore mkt."

Forced Unwinding and Financial Implications

While the measure could support the rupee, the report warned that forced unwinding of positions may have adverse financial implications for lenders. "Unwinding of positions (by 10Apr) may lead to MTM losses in 4Q as positions may be large at USD 30-40bn," the report said.

Heightened Currency Market Volatility

The tightening comes amid heightened volatility in currency markets, where spreads between onshore and offshore markets have widened sharply. Jefferies highlighted that spreads, which were "in the range of 5-15bps" during calm periods, have now expanded to "75-90bps (due to West Asia conflict and rise in oil & gas prices)."

Impact on Profitability

Banks, particularly larger domestic and foreign lenders, could be most affected given their significant exposure to forex derivatives. The report estimates that gross onshore positions of USD 30-40bn are held by major players, and a rapid reduction to the new cap could trigger a large volume of trade reversals. Such moves may also impact profitability. Jefferies cautioned that every Rs 1/USD dual movement in INR on USD 30-40bn of book can lead to a one-time loss of Rs 30-40bn for the banking sector.

Expectations of Regulatory Relief

However, there are expectations that the central bank may soften the implementation. "Our conversations with banks indicate that RBI is considering some leniency that may include grandfathering of existing contracts and applying limits on new contracts," the report said.

It added that regulators could also extend the compliance timeline beyond April 10 to ensure smoother forex movement & MTM impact on banks. The development remains a key monitorable for the banking sector, with the timing and extent of regulatory relief likely to determine the eventual earnings impact. (ANI)

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