Sbi, Bob Start Proprietary Trading In Forex Market

State Bank of India and Bank of Baroda have commenced proprietary trading in the foreign exchange market after the Reserve Bank relaxed the overnight open position limits.

Banks are now allowed to fix their own open position limits and get it approved by the RBI. The open position limits were relaxed quite sometime back and now many banks have started taking speculative positions in a bid to rake in profits. Earlier open positions were capped at Rs 15 crore or $5 million.

Says K Kannan, chairman and managing director, Bank of Baroda: "We have commenced proprietary trading and hope to make profits from this area."

 

SBI's entry into the market has created a scare among foreign banks as it can make the market move the way it wants due to the huge volume of business it has.

Banks take an exposure ratio of 1:4 -- that is, if the deal is of $1 million with an underlying transaction, $4 million will the speculative position. BoB has stuck to a conservative ratio, but a lot of foreign banks are reportedly having ratios as high as 1:8.

For BoB and SBI, a major chunk of the open positions are taken in anticipation of merchant demand. Banks usually know when their customers will approach them for the foreign exchange requirements. Based on this future demand the banks take a position. For instance, if the bank anticipates that there will be a demand of $50 million from a corporate client, it will buy the dollars today if it feels that the greenback will harden.

Suppose the dollar is purchased at 35.80 on day one and falls to 35.82 on day two the bank will make a profit. Says Kannan: "Until banks take positions in the market, the only revenue for dealers would be the small margin between buying and selling. By taking positions, the profit potential goes up substantially, but so does the risk."

Foreign banks used to take positions anticipating demand from oil companies coming through SBI. However, now with State Bank itself taking proprietary positions the business of foreign banks is likely to be eroded. The foreign banks fear that SBI will now hit them quite often by moving the market.