RBI moves to curb rupee bets as pressure mounts

India’s central bank has tightened curbs on rupee trading as pressure on the currency intensifies, signaling that routine intervention alone is no longer seen as enough to contain volatility.

The Reserve Bank of India (RBI) on Friday ordered banks to limit their net open rupee positions in the onshore currency market to $100 million at the end of each business day, with compliance required by 10 April.

The move is meant to reduce speculative pressure on the rupee by limiting the positions banks can carry on their books. It also targets growing spillovers from offshore derivatives trading into the domestic market, which policymakers fear are making it harder for the RBI to steady the currency through its usual interventions.

In effect, RBI is trying to prevent large one-way bets and arbitrage positions from adding to volatility at a time when the rupee is already under strain from higher oil prices, weak risk sentiment and foreign outflows.

The rupee rose nearly 1% in early trading to 93.85 per dollar on Monday, 30 March, after closing at a record low of 94.84 on Friday, as banks rushed to unwind arbitrage positions following the RBI’s new cap.

The 1-month USD/INR forward also dropped sharply, to about 94.13 from near 95.15 on Friday.

Traders said the RBI rule forced banks to cut positions built around the gap between the offshore non-deliverable forward market and the onshore market, prompting onshore dollar selling and supporting the rupee.

The currency had opened about 1% stronger at 93.60 before trimming gains, with analysts saying the measure may stabilize the currency in the near term without changing the deeper pressures from oil, war-driven risk aversion, and capital outflows.

Banks have sought more time to comply, warning that a quick unwind of positions could cause losses and disrupt trading conditions, Bloomberg reported, citing people familiar with the matter.

Reuters separately reported that some banks had asked the RBI for as much as three months, saying a forced rush to meet the new cap could trigger disorderly unwinding of arbitrage trades between offshore and onshore markets.

The move is expected to hit banks’ treasury profits because what had been profitable arbitrage trades could now turn loss-making as lenders unwind them under tighter limits.

The step shows the RBI is trying not just to support the rupee, but to limit the trading positions that can deepen its fall.