Multinational banks, RBI discuss changes needed in banking and forex regulations for T+1 norms

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In view of a shorter settlement timeframe, which is just a few months away, multinational banks have held discussions with the Reserve Bank of India (RBI) on the need to open a ‘dollar placement window’ and extend forex trading hours.

The matter was discussed between bankers and senior RBI officials in two meetings, The Economic Times reported. A ‘dollar placement window’ will absorb sudden inflows of foreign currency that is expected once T+1 comes into force, according to the news report, which also said a dollar pile-up can breach exposure limits if foreign currency that FPIs bring in are not converted. Multinational banks act as custodians for foreign portfolio investors (FPIs).

T+1 settlement

Market regulator SEBI’s new trade settlement guideline T+1 in coming into force by mid of next year for foreign portfolio investors (FPI). The new norms also shorten the time required for fund arrangements by one day.

A T+1 settlement would require conversion of dollars  into rupees after the normal market hours. Though the forex market works 24/7, it would be tough for multinational banks to sell the dollar in the evening when liquidity comes down and only a few banks take part in trading.

A much stronger dollar inflows are expected as government debt papers are expected to be a part of a global bond index and restrictions on foreign investments in sovereign securities are likely to be eased, according to the news report.

The newspaper said that India could become a pre-funded market if the forex market issues are not addressed, raising the cost for FPIs.

Chances of breaching dollar exposure limits

Under the shortened time frame, FPIs need to make the margin payment or pay the full deal amount to the clearing corporation by 7.30/8 pm. This would require conversion of the foreign currency on the same day. According to The Economic Times, if the banks are unable to find buyers, they would park the currency with head office or an overseas branch and this could raise its exposure beyond the regulatory limit.

The newspaper report has quoted a senior banker as saying that the situation can change if US rate hikes result in large outflows, but it could make sense for the central bank to offer a dollar window. There is a need for a more active market beyond regular hours, the banker added.

Currently, cash forex trades, wherein the conversion happens the same day, take place till 3/3.30 pm. Even if the timings are extended and change the dollar-rupee clearing timings, banks have to meet the CRR (Cash Reserve Ratio) requirement. It will be a lot 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, another person is quoted as saying