The defence of the rupee has entered a crucial stage, with the central bank virtually forcing commercial banks to share the burden as it guards the country's forex trove.
Banks often buy dollars cheaply in India and sell them at a premium abroad, keeping risks balanced on paper while profiting from the difference. On Friday, the Reserve Bank of India capped banks' net open positions in the domestic market at $100 million, essentially forcing them to unwind trades, potentially leading to losses. The new rule, which takes effect on 10 April, is a departure from the earlier system that allowed exposures up to 25% of capital after balancing offshore and onshore trades.
“If a bank has sold $500 million offshore and bought $500 million onshore, earlier, the position was zero. Now, they have to bring this down to $100 million; so, $400 million has to be unwound, and definitely, it is a loss to the bank,” said V.R.C. Reddy, head of treasury at Karur Vysya Bank.
According to market participants, while the measure may have some short-term impact, the Indian economy's fundamentals will determine the course of the rupee. While the move may support the rupee from falling further, unwinding positions by 10 April may lead to mark-to-market losses in the March quarter, a Jefferies report said on 29 March, given the overall positions of $30-40 billion.
The RBI move has "shaken the entire market,” a senior treasury official at a private sector bank said, adding the move appears to be shifting the onus to banks.
Queries emailed to the RBI remained unanswered.
The RBI measure will bring some temporary relief to the rupee, but appreciation will be limited because fundamentals remain unfavourable, treasury officials said.
“Currency appreciation may be limited to the extent of unwinding of these current leveraged positions. But once that is settled, I think the currency will again follow the fundamentals, and as long as this crisis continues, rupee will depreciate,” Reddy of Karur Vysya Bank said.
Following the central bank move, the rupee gained 1.3% to touch a one-week high of 93.59 per dollar on Monday, before shedding gains to hit a new low of 95.1250. Likely RBI intervention lifted it to 94.83 at close, little changed from its previous close. The currency has now fallen 4.5% since the West Asia war started on 28 February, and over 11% through FY26.
Since the war began, Brent crude prices have risen over 60%, raising global energy concerns. On Monday, it traded at around $115. The balance of payments situation may be worsening as well. India's current account deficit could widen to $35 billion in FY26 and at least $40 billion in FY27 if the crisis drags on, Gaura Sengupta, chief economist at IDFC First Bank said, straining the rupee further and limiting the RBI’s room to intervene aggressively.
“The RBI’s ability to intervene as in FY26 is constrained by the fact that the forward book is already large. Its last known figure was $67.7 billion net dollar short as of January. It has likely gone to around $80 billion net dollar short, if not more,” Sengupta said. If the crisis lengthens, the RBI will need to ensure that forex reserves are protected. "That's the main point."
Foreign exchange reserves have fallen to $709.76 billion, according to the latest data available till 13 March, from $728.49 billion as of 27 February.
The RBI's pace of intervention has slowed in the second half of March, treasury officials said, allowing the rupee to depreciate gradually.
“The fact that RBI is looking at other measures shows they are viewing this as a long-run-out West Asia war, and they will have to deploy multiple tools, not just depend on their reserves, because there is a limit to intervention that they can do,” Sengupta said, adding that this is a start of such unconventional measures.
When banks unwind their positions, RBI will have to buy back dollars because there will be a pickup in local dollar supply.
Others warn of unintended consequences. Banks believe that losses from forced unwinding could effectively transfer gains to offshore hedge funds. There is also industry pushback, with expectations that the RBI may offer some relaxation or extend compliance timelines.
On Saturday, the central bank held an emergency meeting with senior treasury bank officials to discuss the measure.
"Some representation for a review of the circular is being made by certain banks with the RBI," said a dealer at a private bank. "It is likely to lead to an anomalous situation where the rupee rises onshore and weakens on the non-deliverable forwards (NDF) market, he added.
However, another dealer said this could be a temporary reprieve for the rupee in light of the continued FPI outflows and demand by oil companies.
So far this month, FPIs have net-shorted cash stocks worth ₹1.18 trillion ($12.67 billion) per depository data, exceeding the past record of ₹1.14 trillion hit in October 2024 following fears of a global tariff war.