Tag: India

Large multinational banks have impressed upon the Reserve Bank of India (RBI) the need to open a ‘dollar placement window’ to absorb sudden foreign currency inflow, and extend forex trading hours with the T-plus-One (T+1) settlement in stock exchanges and the expected inclusion of GoI securities in global bond index next year.

These banks, which act as custodians for foreign portfolio investors (FPIs), fear a dollar pile-up could cause a breach of regulatory exposure limits if they are unable to convert the foreign currency that FPIs bring in. The matter was discussed between bankers and senior RBI officials in two meetings over the past few weeks, two persons familiar with the issue told ET.

Shortening the stock settlement cycles from T+2 to T+1 would require arranging funds a day earlier. It’s believed if the forex market issues are not addressed, India could become a pre-funded market, which would raise the cost for FPIs. After several representations, custodian banks and FPIs have managed to buy some time with stock exchanges deciding to introduce the new settlement cycle in a staggered way. FPIs, according to the rollout plan, will have to deal with the T+1 mechanism around mid next year.

• IN FOREX: market, cash deals happen till 3/3:30 pm
• CONVERTING $: From FPIs to INR is tough in the evening
• SO BANKS WANT: RBI to offer a window to accept $ from banks
• A WINDOW FROM RBI will also enable banks selling $ to meet CRR

A T+1 settlement would require conversion of dollars (from FPIs operating in different time zones) into rupees well after the normal market hours. While the forex market is open 24/7, custodian banks would find it difficult to sell the dollar (and generate rupees) in the evening when very few banks trade and liquidity dries up. Besides equities, there could be bouts of dollar inflows into debts once government debt papers are part of a global bond index and restrictions on foreign investments in sovereign securities are loosened.

Regulatory Cap on Exposure
Under T+1, the dollar would have to be converted into the local currency on the same day as trade confirmation and payment of margin or the full deal amount (an FPI buying equities must pay) has to be given to the clearing corporation by 7.30/8 pm. If the custodian bank can’t find a buyer for the dollar, it would park the dollar with its head office or an overseas branch. And this could raise its exposure beyond the regulatory limit.

Under the RBI rule that restricts a bank from taking an exposure of more than a quarter of its tier-1 capital (i.e, equity and free reserves) to a single counterparty, the India branch of a foreign bank and any of its overseas offices are considered as two distinct entities. So, the extra, unsold dollars a foreign bank’s Mumbai branch places with its London or New York office is counted as the local branch’s exposure to the overseas branch.

“Of course, the situation can change dramatically if US rate hikes result in large outflows. But as a medium term strategy, it could make sense for the central bank to offer a dollar window. It would also make the forward premia less volatile. A dollar deposit facility may require regulatory changes. As far as extending cash (forex) market timing goes, it’s up to the banks to decide. But there is a need for a more active market beyond regular hours,” said a senior banker.

“While the T+1 issue is some months away, banks have initiated discussion with RBI after realising that Sebi and the ministry want to go ahead with it. Today, cash forex trades (where the conversion happens the same day) take place till 3/3.30 pm. Even if you extend it and change the Dollar/INR clearing timings, banks have to meet the CRR (cash reserve ratio) requirement. So, it will be easier if a bank can sell the dollar to the central bank under a special window as well as give the extra cash to fulfil CRR requirement. Stock preferred by FPIs would come under T+1 only in the second half of next year. But before that, many in the market expect Gsecs to be included in the bond market,” said another person.

Large multinational banks have impressed upon the Reserve Bank of India (RBI) the need to open a ‘dollar placement window’ to absorb sudden foreign currency inflow, and extend forex trading hours with the T-plus-One (T+1) settlement in stock exchanges and the expected inclusion of GoI securities in global bond index next year.

These banks, which act as custodians for foreign portfolio investors (FPIs), fear a dollar pile-up could cause a breach of regulatory exposure limits if they are unable to convert the foreign currency that FPIs bring in. The matter was discussed between bankers and senior RBI officials in two meetings over the past few weeks, two persons familiar with the issue told ET.

Shortening the stock settlement cycles from T+2 to T+1 would require arranging funds a day earlier. It’s believed if the forex market issues are not addressed, India could become a pre-funded market, which would raise the cost for FPIs. After several representations, custodian banks and FPIs have managed to buy some time with stock exchanges deciding to introduce the new settlement cycle in a staggered way. FPIs, according to the rollout plan, will have to deal with the T+1 mechanism around mid next year.

• IN FOREX: market, cash deals happen till 3/3:30 pm
• CONVERTING $: From FPIs to INR is tough in the evening
• SO BANKS WANT: RBI to offer a window to accept $ from banks
• A WINDOW FROM RBI will also enable banks selling $ to meet CRR

A T+1 settlement would require conversion of dollars (from FPIs operating in different time zones) into rupees well after the normal market hours. While the forex market is open 24/7, custodian banks would find it difficult to sell the dollar (and generate rupees) in the evening when very few banks trade and liquidity dries up. Besides equities, there could be bouts of dollar inflows into debts once government debt papers are part of a global bond index and restrictions on foreign investments in sovereign securities are loosened.

Regulatory Cap on Exposure
Under T+1, the dollar would have to be converted into the local currency on the same day as trade confirmation and payment of margin or the full deal amount (an FPI buying equities must pay) has to be given to the clearing corporation by 7.30/8 pm. If the custodian bank can’t find a buyer for the dollar, it would park the dollar with its head office or an overseas branch. And this could raise its exposure beyond the regulatory limit.

Under the RBI rule that restricts a bank from taking an exposure of more than a quarter of its tier-1 capital (i.e, equity and free reserves) to a single counterparty, the India branch of a foreign bank and any of its overseas offices are considered as two distinct entities. So, the extra, unsold dollars a foreign bank’s Mumbai branch places with its London or New York office is counted as the local branch’s exposure to the overseas branch.

“Of course, the situation can change dramatically if US rate hikes result in large outflows. But as a medium term strategy, it could make sense for the central bank to offer a dollar window. It would also make the forward premia less volatile. A dollar deposit facility may require regulatory changes. As far as extending cash (forex) market timing goes, it’s up to the banks to decide. But there is a need for a more active market beyond regular hours,” said a senior banker.

“While the T+1 issue is some months away, banks have initiated discussion with RBI after realising that Sebi and the ministry want to go ahead with it. Today, cash forex trades (where the conversion happens the same day) take place till 3/3.30 pm. Even if you extend it and change the Dollar/INR clearing timings, banks have to meet the CRR (cash reserve ratio) requirement. So, it will be easier if a bank can sell the dollar to the central bank under a special window as well as give the extra cash to fulfil CRR requirement. Stock preferred by FPIs would come under T+1 only in the second half of next year. But before that, many in the market expect Gsecs to be included in the bond market,” said another person.