Rupee in trouble ? RBI’s emergency move explained

The Reserve Bank of India (RBI) has issued a fresh directive to arrest the sharp decline in the rupee, instructing banks to limit their net open position in the onshore deliverable forex market to $100 million at the close of each business day. This measure comes after the rupee hit an all-time low of 94.84 against the US dollar on March 27, amid sustained global risk aversion, dollar strength, and speculative positioning in the currency markets.

By tightening limits on banks' open forex positions, the central bank aims to curb excessive dollar bets, reduce speculative activity, and ease pressure on the domestic currency. Notably, this is the first such directive in nearly 15 years, highlighting the urgency of the situation as the rupee has already depreciated nearly 11% in the current financial year and about 4% since the outbreak of recent geopolitical tensions.

A former Chairman of a Public Sector Bank viewed the RBI's action positively, noting that banks had previously built open positions in the domestic market while hedging in overseas markets, including the NDF (non-deliverable forward) segment. The new cap restricts open positions strictly in the onshore market to $100 million, curbing speculative tendencies that have accelerated the rupee's fall.

He pointed out that the rupee's recent depreciation far exceeds the historical average of 3-4% per year, making the intervention necessary to ensure dollar availability is channeled into the market to calm volatility. He highlighted external pressures such as rising crude oil prices, remittance outflows, and FII selling as key contributors to the strain. In his opinion, the move serves the larger economic interest by preventing external factors from unduly influencing the rupee-dollar parity.

A leading economist at an online stock trading firm described the current scenario as a "double whammy" for the rupee. On the current account side, higher oil prices and a widening trade deficit are exerting pressure, while on the capital account, substantial FII selling is adding to the strain. She noted that this could result in a Balance of Payments (BoP) deficit, potentially extending into FY27, suggesting the rupee has a fundamental weakening bias. She considered the RBI's cap on open positions appropriate in the face of speculative attacks. While it may hit bank profitability through MTM losses, the broader economic interest takes precedence.

A forex expert called the RBI's move "fantastic," likening it to a strong signal to the market. In the short term, he expects some appreciation in the dollar-rupee pair, potentially pushing the rupee stronger toward 90.50 levels, with importers buying on dips. However, he cautioned that the overall trend remains dependent on geopolitical tensions. Persistent high oil prices, continued FII outflows, and a rising trade deficit will continue to weigh on the rupee structurally.

Head of Treasury at an MNC bank provided context on why the move was necessary. India's forex reserves stand at around $698 billion, with gold holdings of $120 billion. After accounting for the RBI's net short forward position (estimated at $200 billion), the effective net position is roughly $470 billion—less than 9 months of import cover. This is concerning amid ongoing geopolitical tensions involving the US, Israel, and Iran. He added that rising 10-year US Treasury yields and lack of expected Fed rate cuts are driving FII outflows from Asian markets, compounding geopolitical pressures.

When asked about banks' requests for more time to comply with the $100 million ceiling (with the deadline reportedly around April 10), the ex- bank Chairman stressed that the RBI, as regulator, must prioritize systemic stability over individual bank profitability. Any short-term impact on balance sheets should be viewed in the context of the larger economic good. The forex expert warned that while the move provides short-term support to the rupee, it could increase volatility in the onshore market after April 10, as offshore markets regain influence over pricing.

He opined that the fluctuations may become more frequent, and hedging costs across tenures could rise. He described it as a trade-off: the RBI is prioritizing volatility reduction and preventing a drastic weakening reminiscent of 2008 or 2013 scenarios over immediate bank profits or lower hedging costs. He advised market participants to view the 94.50–95.20 zone as a buying opportunity for exporters (increasing hedge ratios) and cautioned importers against panic buying.

One broad agreement was that the RBI's directive is a bold, necessary step to restore stability in unusual times. While short-term relief for the rupee is expected, structural challenges from oil, FII flows, and global factors remain. All eyes are now on the next monetary policy announcement and any additional measures the central bank may deploy to support the economy and the currency.