The Reserve Bank of India (RBI) has decided to cap banks' positions in foreign exchange futures market to stem the free fall of the rupee against the U.S. dollar.

The RBI capped the position limit for banks in the exchanges for trading Currency Futures and Options at $100 million or 15 per cent of the outstanding open interest, whichever is lower, and asked them to bring down their positions to the these limits by June 30.

The RBI must have noticed that banks had taken large positions in the futures market. “This kind of speculative position in the futures may be causing the fall of rupee against the dollar,” said a trader. Further, the RBI had possibly noticed that banks might be engaged in arbitrage between the spot and the futures market.

The RBI said that the positions in the exchanges (both Futures and Options) could not be netted / offset by undertaking positions in the OTC market and vice-versa. “The positions initiated in the exchanges shall be liquidated / closed in the exchanges only,” RBI said in a notification.

The RBI has also decided that the current net overnight open limit (NOOPL) of the banks, as applicable to the positions involving rupee as one of the currencies, “shall not include the positions undertaken in the currency futures / options segment in the exchanges.”

“The RBI is trying to exercise all its available ammunitions to control the speed of the falling rupee,” said K. N. Dey, Director, Basix Forex, a foreign exchange risk management consulting firm. “RBI wants to curb the volumes in the futures exchanges so as to check the fall of rupee in the spot market,” Mr. Dey added.