Mini Rally

The rupee depreciated by around 20cts from Rs. 94.70 to Rs. 94.90 against the greenback, during the mid-day trading today.

rnrnThe Central Bank has yesterday decided to widen the daily positive net open position (NOP) of commercial banks from 10 percent to 15 percent of capital and reserves. The bank also extended the foreign exchange forward contract duration to one year with effect from March 1, signalling a wave of de-regulation in the forex market.

rnrnThe NOP reflects the working balances in all foreign currencies held by a commercial bank at the end of the day.

rnrnThis higher limit helps commercial banks to manage their foreign exchange positions, while financing even large import bills, without causing excessive volatility in the foreign exchange market.

rnrnThis led to many banks flocking to increase their dollar position, resulting in a sharp gain against the rupee this morning, dealers said.

rnrnldblquote Banks are buying dollars in relatively large volumes after the limit was increased, driving the spot rate up. However, a large import bill put to the market by Shell also created a demand for dollars, yesterday
dblquote , a forex broker said.

rnrnAccording to analysts, banks are accumulating dollar positions to speculate on the much-anticipated benchmark repo interest rate cut, expected shortly.

rnrnldblquote Banks were not able to act on the interest rate cuts announced in the near past, due to the limit on Dollar holdings. Increase in the OCP limit, now enables them to take long positions on Dollar to exploit the next interest rate cut
dblquote , a money market analyst said.

rnrnldblquote But, if the banks continue to speculate at this rate, Central Bank will lower the holding limit, as they have done in the past. Banks have to demonstrate responsibility in their behavior
dblquote , he added.rn