More Stories

Informist, Monday, Mar. 30, 2026

 

By Pratiksha

 

NEW DELHI – The Reserve Bank of India's move Friday to tighten control over banks' foreign exchange positions will help to curb the build-up of speculative bets against the rupee, analysts and traders said. However, the RBI's focus on this short-term gain comes at the cost of stepping back from its aim of gradual capital account convertability of the rupee, they said.

 

The central bank, post market hours Friday, mandated banks to ensure that their net open rupee positions in the onshore deliverable foreign exchange market should not exceed $100 ‌million at the end of each business day, latest by Apr. 10. Under extant norms, banks can set such net open position limits up to 25% of their total capital.

 

The central bank's direction came as the Indian currency depreciated over 4% against the dollar this month, in the face of a surge in crude oil prices and strong foreign portfolio outflows after the US and Israel attacked Iran on Feb. 28.

 

By restricting the positions to just gross onshore positions, the RBI has directly targeted the popular trade where banks buy dollars onshore and sell the greenback in the non-deliverable forward offshore market to benefit from the spread, in effect funded by onshore liquidity. Market participants' estimate for such positions is around $35 billion-$40 billion as of Friday, with large banks holding around $5 billion worth of positions each.

 

Dealers said the tighter norms on foreign exchange transactions would prompt traders to unwind arbitrage trades between the non-deliverable forward and onshore markets, leading to a sharp appreciation of the rupee in the near-term.

 

The build-up of speculative positions, mainly in the non-deliverable forward market, has been a big pain point for the RBI for a long time. While rupee trade is carried out in Mumbai, prices are mostly determined in global hubs such as Singapore, London, and New York, where investors can take positions without access to the domestic market or even without an underlying exposure.

 

This dilutes the RBI's effort to support the rupee in the onshore market and also drains foreign exchange reserves that the central bank has to use to prevent the rupee from going into a free fall. However, what the banks' increased trading activity in the offshore market also does is serve as an interim step toward full convertibility, allowing for the development of the market while the country retains control over its capital account.  

 

To be sure, the RBI had allowed banks with International Financial Services Centre banking units to foray into the offshore non-deliverable forward rupee derivative market only in 2020.

 

"I think if you want to globalise the currency, then at some point you have to unify the domestic market and NDF market. You have to gradually bring both of them on par," Jayanth Varma, former member of the RBI's Monetary Policy Committee, said. "We were going in that direction with liberalisation. Now, you are interrupting that. The compulsion might be to provide short-term relief for the currency."

 

The 2006 Tarapore Committee report on fuller capital account convertibility did not focus heavily on regulating the NDF market itself but had recommended structural reforms to engineer such stability in the rupee that offshore, non-deliverable markets would not lead to excessive volatility. 

 

Moreover, noting the rupee's movement on Monday, market participants pointed out that the RBI's latest step seems to be barely providing even near-term support to the rupee.

 

While the Indian currency opened 122 paise higher against the dollar Monday, posting its biggest opening gain since September 2013, the appreciation was fleeting as the rupee went on to fall below the psychologically crucial level of 95-per-dollar for the first time and hit a record low of 95.22 a dollar. This fall was primarily due to a sharp rise in crude oil prices and strong outflows from foreign portfolio investors, dealers said.

 

"Over the medium term, we continue to think that the fundamental flow picture still points towards a weaker INR (rupee) moving forward, especially if the Iran and Middle East conflict is prolonged and escalates further," Michael Wan, currency analyst at MUFG Bank, said.  

 

THE OTHER SIDE

There are, of course, two sides to a coin.

 

Wan highlighted that it makes perfect sense for the RBI to implement policies to try to break one-way bets on the rupee at the current juncture, as the Indian unit had started to reach levels which pushed up inflation expectations and began to weaken financial stability. "...what needs to change for INR is a more sustained period of capital inflows," he added.

 

A former senior official at the RBI explained, on condition of anonymity, that such curbs can be in place on a temporary basis and as soon as a sense of sanity appears in the market, these can be done away with.

 

Market veteran Jamal Mecklai also favoured the central bank's latest action in the currency market, saying such steps are needed during times of great uncertainty. 

 

"When the world is falling apart, nobody has any idea what is going to happen. It is a very good thing that the RBI has done," Mecklai, who is also the managing director of Mecklai Financial Services Ltd., said. "They should be even more aggressive. People have been very opportunistic. Now everyone is alarmed."  End

 

US$1 = INR 94.83

 

Edited by Tanima Banerjee

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.