New Limits

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The revision, the bank says would help deepen the foreign exchange market, making it attractive for commercial banks to carry out their international operations efficiently and strengthening prudential regulations relating to commercial banking operations. rn

rnThe new revision has Fixed NOP up to 20 percent of the core capital available in a bank, depending on the status of the capital availability. rn

rnThe NOP of a commercial bank is the difference between its total foreign exchange assets and total foreign exchange liabilities at the end of each day, after adjusting for all foreign exchange transactions done during the day. rn

rnNOP could be positive (overbought) or negative (oversold) depending on whether foreign exchange assets exceed foreign exchange liabilities or vice versa. rn

rnLimits on NOP are a prudential requirement as unduly large net open positions may subject banks to excessive risks due to exchange rate volatility. rn

rnThe Central Bank on Friday revised the limits on the daily foreign exchange net open positions (NOP) of commercial banks starting from September 1. rn

rnThe revision, the bank says would help deepen the foreign exchange market, making it attractive for commercial banks to carry out their international operations efficiently and strengthening prudential regulations relating to commercial banking operations. rn

rnThe new revision has Fixed NOP up to 20 percent of the core capital available in a bank, depending on the status of the capital availability. rn

rnThe NOP of a commercial bank is the difference between its total foreign exchange assets and total foreign exchange liabilities at the end of each day, after adjusting for all foreign exchange transactions done during the day. rn

rnNOP could be positive (overbought) or negative (oversold) depending on whether foreign exchange assets exceed foreign exchange liabilities or vice versa. rn

rnLimits on NOP are a prudential requirement as unduly large net open positions may subject banks to excessive risks due to exchange rate volatility. rn

rnThe Central Bank set limits on commercial banks quote daily net foreign currency open positions as a prudential measure, prior to partially floating the rupee in January 2001.rn

rnAt the time of its introduction in January 2001, this limit was imposed on each commercial bank at 10 percent of the capital funds of the domestic banking unit (DBU), inclusive of reserves, in respect of positive (overbought) net foreign currency open positions. rn

rnCentral Bank said that the objective of these limits was to ensure the foreign exchange market stabilised once the rupee was floated. rn

rnOver the past two years, most of the restrictions that were introduced along with the change of exchange rate regime have been relaxed as the market has gained experience and stability. rn

rnFor example, the limit on the daily net foreign currency open (positive) positions were enhanced, in March 2002, when it was increased from 10 percent of capital (of the domestic banking units DBU) to 15 percent of DBU capital, with the minimum limit fixed at US$ 500,000. rn

rn"Given the developments in the forex market and the increase in activity, the Central Bank is of the view that a further revision of the NOP limits is warranted," it added. rn