Bankers are bracing for potential trading losses after the Reserve Bank of India introduced a cap on banks’ open foreign exchange positions, a move that is expected to trigger a sharp rise in the rupee at the start of the week. The central bank has directed lenders to limit their net open rupee positions in the onshore forex market to $100 million by the end of each business day, with compliance required by April 10.
The decision comes amid intense pressure on the rupee, which had recently fallen to record lows due to foreign fund outflows, rising crude oil prices, and uncertainty linked to the West Asia conflict. By tightening position limits, the RBI aims to reduce speculative trades and close the arbitrage gap between the onshore market and the offshore non-deliverable forward (NDF) market.
The market’s immediate response has been strong. As banks race to unwind long-dollar bets established over the past few weeks, currency traders expect that the rupee will open much higher on Monday. Before volatility sets in, early projections indicate that the rupee might rise by almost 1% in opening trade.
Banks Face Mark-to-Market Losses on Treasury Books:
Although the RBI’s action might help the rupee temporarily, banks’ treasury operations would probably suffer as a result. In recent months, a number of lenders have created large trading positions by taking advantage of the price differential between the offshore NDF market and the local currency market. The rupee’s decline had made these trades successful.
Now, with the new cap in place, banks are being forced to unwind those positions quickly. According to market estimates, banks collectively may have built positions worth $25 billion to $35 billion, and the rapid unwinding could lead to significant mark-to-market losses. Treasury desks are especially concerned because even a small widening in spreads can translate into heavy losses on large books.
For example, traders noted that every one-paisa widening in the spread on a $30 billion arbitrage book can result in losses of roughly ₹30 crore. With spreads having widened sharply since the RBI announcement, treasury profits for the quarter may take a direct hit.
Rupee Likely to See Sharp Opening Rally:
The biggest near-term impact of the RBI directive is expected to be visible in the rupee’s movement. Since banks will need to cut long-dollar exposure, the local market is likely to see heavy dollar selling, which naturally strengthens the domestic currency.
Traders expect the rupee to open much stronger against the US dollar, possibly recovering a large part of last week’s losses. The currency had ended Friday near record lows, but the forced unwinding of positions could create a strong technical bounce. Some analysts believe the rupee may briefly move below the 94-per-dollar mark if the selling pressure on dollars intensifies. However, experts caution that this strength may not last for long. Broader concerns such as elevated crude oil prices, geopolitical risks, and continued foreign outflows still remain key pressure points for the currency.
Policy Move Offers Stability but Raises Market Concerns:
The RBI’s latest intervention is being viewed as a currency defence measure aimed at restoring stability in the forex market. By limiting banks’ ability to carry large open positions, the central bank is attempting to curb speculative activity and reduce volatility in the rupee. At the same time, the move has sparked concerns within the banking sector. Several lenders have reportedly approached the RBI seeking a three-month extension to comply with the new limits, arguing that immediate implementation could create disorderly market conditions and magnify losses.
The coming trading sessions will be crucial in determining whether the rupee’s rally sustains or fades. While the RBI’s action may provide immediate relief, the broader macroeconomic environment will continue to dictate the currency’s long-term direction. In the near term, however, all eyes remain on Monday’s market open, where the rupee is widely expected to post a sharp gain even as banks prepare for possible treasury losses.
