Banks rushed to settle their foreign exchange positions ahead of Friday’s deadline set by the Reserve Bank of India (RBI), five treasury officials told Mint. Despite the new net open position (NOP) restrictions being framed as temporary, bankers expect these curbs to remain in place for several months.
On 27 March, the RBI capped banks’ NOPs in the domestic market at $100 million at the end of each business day, and mandated that banks comply with this rule by 10 April. In banking and foreign exchange, an NOP is the difference between a bank's total assets and total liabilities in a specific foreign currency (like the US dollar). It measures a bank's unhedged exposure to exchange rate fluctuations.
“Our bank does not have exposure to NDF (non-deliverable forward) transactions, while some peer banks have unwound their open positions,” said VRC Reddy, treasury head at Karur Vysya Bank.
According to bank treasury officials, lenders have complied with the directive by cutting their exposures, though the adjustment has come with costs and disruptions to established trading strategies. “We have unwound our positions and we report that data to the RBI,” a senior treasury official at a private sector bank said.
Blow to profits
The unwinding has weighed on banks’ profitability. The forex derivative market is dominated by larger banks with gross onshore positions of $30-40 billion that offset each other, a 29 March Jefferies report said. Banks often buy dollar forwards cheaply in India and sell them at a premium abroad, keeping risks balanced on paper while profiting from the difference.
The central bank’s move was aimed at checking speculative build-up and arbitrage between the offshore NDF market and the onshore forwards market. Since the NOP circular came into effect, the Indian rupee has appreciated by more than 2%. On Friday, it closed at 92.7312 per US dollar.
On 8 April, RBI governor Sanjay Malhotra assured markets that the aim of the recent measures concerning the rupee was to curtail excessive volatility and did not signal any structural change. “In the long term, we stand committed to the development, broadening and deepening of the markets and the internationalization of the rupee…obviously, these measures are not going to remain forever,” Malhotra had said in reply to a question from the media at the post-policy conference.
Temporary, but how temporary?
Despite RBI governor’s assurance, market participants do not expect a rollback in the near term. “This is a temporary step; they will reverse it. But I don’t think it is going to happen so soon, at least not until the war settles down. They won’t reverse it even if pressure on the rupee subsides because the rupee was depreciating a lot pre-war as well,” a second senior treasury official said.
The rupee has fallen by nearly 5% against the dollar since the war in West Asia broke out on 28 February, having shed 11% in FY26 due to continuous selling by FPIs.
Reddy of Karur Vysya Bank said, “These actions have effectively contained volatility and arrested depreciation pressures in the near term. However, once global uncertainties ease and FX inflows stabilize, there is a possibility that the regulatory stance may gradually revert to more normalized levels. In the interim, these measures are exerting some pressure on market liquidity and have led to an increase in hedging costs.”
Gaura Sengupta, chief economist at IDFC First Bank expressed a similar view, saying the NOP restrictions were likely to be eased only once the global market conditions improved.
On 10 April, Reuters reported that the RBI plans to move ahead with a proposal mandating that banks report offshore rupee derivative trades despite objections from lenders. In February, the central bank had proposed that banks report rupee foreign exchange derivative transactions undertaken globally by their related parties, arguing it would support more efficient price discovery.