Concerned about the falling value of the rupee amid the rise in oil prices and fears over inflation in the wake of the West Asia conflict, the Reserve Bank of India last week instructed banks to limit their net open exposure to the currency in the foreign exchange market to $100 million by the end of each day. Authorised dealers must comply with this rule by April 10.
However, the RBI’s forex cap decision failed to support the rupee, which fell below the 95 level against the dollar intra-day on Monday (March 30) and closed at 94.81/94.83 even as oil prices remained above $100 per barrel and conflict continued in the Middle East. The directive has also unsettled banks, as it could lead to mark-to-market losses for them.
Why RBI introduced forex cap
The RBI’s goal in taking this step is to stabilise the falling rupee and protect the country’s foreign exchange reserves, which have fallen since the West Asian conflict started a month ago. The central bank introduced this cap as the Indian rupee has recently hit historic lows of 94.81 against the dollar, showing a fall of four per cent since the war started in late February. The RBI’s measure is aimed at halting the rupee’s decline by limiting how much foreign currency exposure banks can maintain onshore.
Previously, banks could hold net open positions up to 25 per cent of their total capital, a much higher allowance than under this the new cap. “Banks have been directed to unwind large currency positions by April 10, a move designed to trigger a temporary surge in dollar supply and provide immediate relief to the rupee. The RBI shifted its strategy from direct market intervention to regulatory tightening to preserve its “war chest”, said Devarsh Vakil, Head of Prime Research, HDFC Securities.
Further, as the presure on the currency built up, the RBI has used the dollar in its forex kitty to stabilise the rupee. As a result, forex reserves of the country have fallen by over $30 billion to $698.34 billion since the conflict started. “The (RBI) move signals heightened concern around currency volatility and reflects the central bank’s attempt to stabilise excessive fluctuations. However, it also underscores the fragility in external balances amid rising oil prices and capital outflows,” said Hariprasad K, Founder, Livelong Wealth.
The heavy foreign investor outflows have pulled the rupee down sharply, which has broken past the 92-, 93-, and now 94-per-dollar levels just this month. The Indian currency had weakened below 90- and 91-per-dollar back in December 2025, and is now precariously close to the 95-per-dollar mark.
Foreign investors were net sellers on all trading days in March, so far, taking the total FPI selling through exchanges in March through 27th to a record Rs 1.13 lakh crore. The weakness in global equity markets following the war in West Asia, the steady depreciation of the rupee, fears of decline in remittances from the Gulf region and concerns surrounding the impact of high crude price on India’s growth and corporate earnings contributed to the sustained selling by FPIs.
Why banks are worried
Bankers are increasingly uneasy about the proposed regulatory changes, as these could have immediate financial and operational consequences. One of their primary concerns is the speed of implementation. Banks have urged the RBI to allow a transition window of about three months, giving them sufficient time to gradually reduce or restructure their existing foreign exchange positions. An abrupt enforcement would leave little room to manage risk effectively and lead to losses, said an analyst, tracking the deveopment.
The scale of current exposure adds to the anxiety. Individual banks are estimated to hold sizable dollar positions making the system-wide exposure quite substantial. If the new limits are enforced without delay, banks may be compelled to rapidly unwind these positions, potentially leading to total dollar sales in the range of $11–15 billion across the sector, according to market estimates. Such a large-scale selling could have direct financial repercussions. Banks may incur mark-to-market losses if they are forced to exit positions at unfavourable exchange rates. These losses would be reflected in their treasury books for the ongoing March quarter, thereby putting pressure on overall profitability and earnings.
Beyond immediate losses, the proposed changes could also affect a key source of income. Banks often benefit from currency arbitrage opportunities, taking advantage of price differences between onshore and offshore markets. Tighter limits would restrict their ability to pursue such strategies, reducing a stream of trading revenue.
There is also a broader market implication. With domestic banks facing stricter constraints, trading activity may shift to offshore markets where such rules are less restrictive. This could encourage speculative positions against the rupee outside India, potentially increasing volatility and weakening the currency in external markets. In short, banks are not just worried about short-term financial losses, but also about less flexibility and low earnings potential.
More measures on the anvil?
If the rupee slide continues, the RBI is likely to announce more measures to stabilise the rupee and forex reserves, market observers say. During the global financial crisis and taper tantrum (reduction in economic stimulus), then RBI Governor Raghuram Rajan responded to pressure on the rupee by attracting foreign currency inflows, notably through the FCNR(B) scheme with subsidized swap rates that brought in over $30 billion and boosted reserves. The RBI also provided dollar swap windows for oil companies to ease forex demand and raised repo rates to curb inflation and attract investors.
At the same time, reforms eased foreign investment rules for FPIs and ECBs, while import restrictions, especially on gold, helped reduce outflows. As inflows rose, the RBI built up reserves, stabilizing the rupee and strengthening investor confidence and comfortably tackling the global financial crisis.
If the situation deteriorates further, the RBI still has several tools at its disposal to support the rupee and strengthen foreign exchange reserves.
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