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The Central Bank has enhanced the limit on the daily positive Net Open Position (NOP) of commercial banks from 10 per cent of capital and reservs to 15 per cent and extended the limit on the duration of forward contracts in foreign exchange to one year with effect from 1 March 2002, in order to further improve the flexibility and stability of the foreign exchange market. The Net Open Position reflects the working balances in all foreign currencies held by a commercial bank at the end of the day.

Following the independent float of the rupee in January 2001, several prudential measures were introduced, in consultation with commercial banks, to prevent excessive volatility in the foreign exchange market. Almost all of these measures have now been removed or relaxed.

As a further measure in this direction, the positive net open position of commercial banks has been increased to 15 per cent of capital and reserves, which is in line with limits imposed by many countries for prudential purposes. This enhanced limit would enable commercial banks to manage their foreign exchange positions, while financing even large import bills, without causing excessive volatility in the foreign exchange market.

One of the recent features of the foreign exchange market has been the improvement in forward market activities. Forward transactions have increased in terms of both volumes and duration. The development of forward transactions adds depth to the foreign exchange market and helps to avoid excessive volatility. Hence, in order to enable the forward market to develop further, the Central Bank has extended the limit on the duration of forward contracts to one year, states a Central Bank release. 

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