How RBI's proprietary trading ban helped rupee gain

Moneycontrol Bureau

On the backdrop of the Reserve Bank of India's (RBI) ban on proprietary trading the Indian rupee pared some of its losses against the US dollar. At 15:30 hours the local currency was trading at 60.18 against the greenback. It had touched record low at 60.62/USD on Monday.

"The ban on the proprietary trading led to some uncertainty initially among currency traders," a chief dealer from a bank told moneycontrol.com.

"In the morning trade, some resorted to panic selling of dollars. This pushed the rupee to hit intra day high of 59.65/USD. Later, the market absorbed the latest RBI move and got back some stability. Market fundamentals remain unchanged," he said.

Banks carry out currency trading on behalf of their clients while they have a separate desk to trade in the foreign exchange market of their own. The latter is called proprietary trading.

Also read:Currency derivative clampdown: Will it really help rupee?

"On a review of the evolving market conditions, it has been decided that (authorized dealers) banks should not carry out any proprietary trading in the currency futures / exchange traded currency options markets.  In other words, any transaction by them in these markets will have to be necessarily on behalf of their clients," RBI said in a notification issued on Monday at night.

The central bank has cautioned that those instructions shall come in to effect immediately and shall be in force till further orders.

In the forex parlance, it is widely believed that proprietary trading adds to more volatility to the rupee-dollar exchange rates. Thought the volume could not be ascertained but traders are of opinion that the ban on proprietary trading is expected to come handy especially when the rupee continues to decline against the US dollar.