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Informist, Friday, Apr. 10, 2026

 

By Pratiksha

 

MUMBAI - Reserve Bank of India Governor Sanjay Malhotra Wednesday said the central bank's recent foreign exchange measures won't be in place forever. Ideally, this should be a source of relief for currency traders, as his comments suggest a definite possibility that domestic market participants will be able to access the offshore market again in the near future. 

 

But that is not how it's playing out. While the RBI's move gave a boost to the rupee considerably, it has also wreaked havoc on banks, which had to scramble to unwind their large offshore arbitrage positions. The measures have also practically drawn a line between the onshore and offshore markets. 

 

On Mar. 27, the RBI directed authorised dealers to ensure their net open rupee positions in the onshore market do not exceed $100 ‌million at the end of each business day, latest by Apr. 10. It further doubled down on its support for the rupee and issued more directions on Apr. 1, prohibiting banks from offering rupee non-deliverable derivative contracts to resident or non-resident clients, effective immediately. The central bank also said that companies couldn't rebook cancelled forward contracts. 

 

Before the onset of war in West Asia on Feb. 28, the rupee was on a strong footing and appreciated over 1% against the dollar in February. However, after the war broke out, the rupee had declined almost 4.2% against the dollar. Following the RBI's directions, the Indian currency has recovered almost 3% of those losses. While these measures pulled the rupee back to 92.40 from its low of 95.22, reversing more than half its fall after the war broke out, even this small recovery has come at a substantial price.

 

Market participants said the RBI's deployment of drastic measures in the foreign exchange market after almost 13 years, without any warning, has sown seeds of uncertainty and fear. And, rolling back these measures can only do so much to allay those worries, they added.  

 

"It is not a tubelight that you just switch on and off. These are big measures with big consequences," the trading head at a foreign bank said. "The damage has already been done. I don't think we can go back easily even if they (RBI) reverse measures."

 

Before the RBI directed banks to limit onshore net open rupee positions to $100 million by Friday, banks together held around $35 billion-$40 billion in such positions, with some large banks individually holding around $5 billion each, according to estimates by market participants.

 

"While we expect these NDF restrictions to be withdrawn in due course, the uncertainty around the policy regulations may delay normalisation of trade volumes," Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said in a note.

 

The last time the RBI came up with such extreme measures to support the rupee was in 2013, when the currency had fallen over 13% against the dollar in just a month. Then, the RBI had swapped dollars raised by banks via foreign currency non-resident deposits at concessional rates. The central bank had also raised the overseas borrowing limit of banks to 100% of their unimpaired tier-1 capital from 50%. The RBI had also changed several rules through the year for banks' foreign exchange positions to curb speculation and stabilise the rupee.

 

This time, the RBI acted after the rupee fell over 4% against the greenback in March due to a surge in crude oil prices after the US and Israel attacked Iran. Some market participants question whether the central bank acted a bit early, considering the fall of the rupee was driven by fundamentals as crude oil prices had spiked sharply and that the fall was not sharp enough to merit such strong action.

 

Malhotra cited "heightened volatility" and "build-up of arbitrage positions between the non-deliverable forward market and deliverable market" as the reasons behind these measures. The central bank has been known to routinely state that it intervenes in the currency market only when there is "heightened" or "excessive" volatility in the exchange rate. However, the RBI under Malhotra's leadership has been seen intervening aggressively to stomp out speculative bets and this is in stark contrast to the RBI under Malhotra's predecessor, Shaktikanta Das, when the central bank had held the rupee almost rock steady for months.

 

The RBI's latest measures on account of "heightened volatility" leave a lot of questions in the minds of market participants. What is the definition of "heightened volatility"? What is the threshold for the RBI to come up with such strong measures?

 

"We don't know why RBI suddenly came up with these extreme measures in the first place. It was very unexpected. I really think they should have done something towards attracting inflows rather than making these technical changes to the market," said a currency trader at a private sector bank. "Even if they upturn their actions on paper, it will take time for things to change in reality."

 

Even after the market is restored to normal, market participants will be left second guessing every move whenever there is more than usual volatility in the exchange rate, fearing such extreme steps by the RBI, dealers said. In fact, market participants said there would be a sense of hesitation to trade in the offshore market, now that the central bank's displeasure about increased onshore-offshore activity is widely known and banks have borne the brunt of it. 

 

"Banks are extremely upset with the RBI about this (latest FX curbs), which will have an INR 70 billion-INR 80 billion loss for the system – that is a huge chunk of an entire quarter's profit!," a senior treasury official at another private sector bank said. "I don't think we will return to the NDF market after this, knowing that the RBI can slap these norms on us anytime. It has been a messy exit."

 

The governor said that the central bank continues to stand committed to the development, broadening, and deepening of the foreign exchange market and to the internationalisation of the rupee in the long term. However, now that banks have had to trim their positions in the offshore market to negligible amounts, it will be a challenge for the central bank to bring trading volumes back in a market where Indian banks had been trading unfettered for the last six years.

 

Since the RBI has taken a few steps back from its aim of gradual capital account convertibility of the rupee, it seems only patience and time will help it retrace its past progress. More importantly, the central bank will have to work towards regaining the market's trust as well.  End

 

US$1 = INR 92.66

 

Edited by Avishek Dutta

 

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