Banks have urged the Reserve Bank of India (RBI) to reconsider its decision to cap net open foreign-exchange positions involving the rupee at $100 million, warning that the move could result in significant mark-to-market (MTM) losses and compel an accelerated unwinding of trades, according to people aware of the matter.
The directive, issued on Friday with compliance by April 10, comes at a time when dollar-long bets had built up significantly. Market estimates suggest $40 billion of large long-dollar positions would be squared off in the near term.
By forcing banks to reduce these exposures, the central bank is effectively engineering a near-term supply of dollars in the onshore market.
The rupee has depreciated over 4 per cent since the onset of the Iran conflict in late February, emerging as the worst-performing Asian currency in the current calendar year, and is headed towards witness its steepest fall in a financial year since FY14. It settled at a fresh low of 94.81 per dollar on Friday.
Lenders have proposed that the revised limit be applied only to incremental positions, a step that would safeguard existing exposures and ease near-term pressures on balance sheets.
Market participants are also seeking a transition window. A three-month period to align positions with the new cap was seen as reasonable, while some expect a shorter extension until the end of the month.
Some participants, however, said that the RBI’s sudden move indicated a targeted and possibly temporary intervention, with little likelihood of near-term relaxation. The uniform cap suggested the focus was on curbing market volatility rather than protecting banks and the framework could be refined or withdrawn over time.
“Given the suddenness of the move, it appears to have been taken with a clear intent. I am not sure if the RBI will offer any immediate relaxation. If there had been consultation, it might have been rolled out differently. The fact that it was introduced suddenly suggests that the RBI had a specific concern in mind. I would expect this to be a temporary measure,” said a senior executive at a private bank.
“If the intention were to specifically protect banks, the limits would likely have been linked to bank size. For instance, a large bank and a much smaller bank would not have the same cap. This is more about managing market volatility than about the banks themselves. It may be fine-tuned later or even withdrawn,” the person added.
Bankers said positions worth about $40 billion might need to be cut in the absence of any relaxation. The number could be higher if options are included. With the financial year ending March 31, banks may have to book these losses in FY26 earnings.
Market participants said that this could lead to a technical appreciation of the rupee in the immediate term, with the rupee likely to test 92.50-92.80 as positions get unwound.
The move marks the first time since 2011 that the RBI has explicitly set a limit on the net open position (NOP), a parameter typically left to individual bank boards. Market participants said the step underscored the central bank’s intent to directly curb speculative activity and arrest the pace of depreciation.
The updated norm requires banks to maintain their NOP-INR within the prescribed limit at the close of each business day, effectively capping the currency risk they can carry overnight. Market participants said that this would bring greater discipline to forex-risk management but could also limit trading flexibility and potential gains.
Additionally, market participants said broader drivers, including elevated crude oil prices, geopolitical uncertainty and foreign portfolio outflows, continued to weigh on the rupee, and the central bank’s measures could at best smooth volatility rather than reverse the trend.
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