RBI Mandates Dollar Unwind to Stabilize Rupee, Impacting Banks

The Reserve Bank of India (RBI) has implemented an "unorthodox" and dramatic measure to curb the rapid depreciation of the Indian rupee, mandating that banks unwind their net open foreign exchange positions beyond $100 million by April 10, 2026. This directive marks a significant departure from previous norms, which allowed banks to maintain net open positions of up to 25% of their net worth. The primary objective of this action is to prevent the rupee from sliding further, potentially towards the 95-per-dollar mark, amidst mounting global pressures. The rupee has been under severe strain, plummeting to successive record lows, hitting approximately ₹94.79-₹94.85 per dollar on March 28, 2026. It has depreciated by over 10% in the current fiscal year and roughly 3.5-4% since the onset of the West Asia conflict in late February/early March. Several factors are contributing to this downward pressure. Escalating geopolitical tensions in the Middle East, particularly the Iran conflict, have pushed crude oil prices significantly higher, with Brent prices holding above $100-$110 per barrel. For India, a major oil importer, this translates into a wider current account deficit and increased demand for dollars. Furthermore, Foreign Institutional Investors (FIIs) have been net sellers in the Indian markets, pulling out a record ₹1.18 lakh crore (approximately $12 billion) from Indian equities and $1.6 billion from index-eligible bonds in March alone. While the RBI's move aims to stabilize the currency, it comes at a significant cost to the banking sector. Banks had been exploiting arbitrage opportunities by buying dollars in the onshore market at lower premiums and selling them in the offshore non-deliverable forwards (NDF) market at higher premiums. This new cap effectively disrupts these large, one-sided bets against the rupee, forcing banks to rapidly trim their onshore dollar holdings. The total value of these positions that banks are compelled to unwind is estimated to be between $25 billion and $50 billion, with some sources putting it at $30-40 billion. This forced unwinding is projected to result in substantial mark-to-market (MTM) losses for banks, potentially reaching up to Rs 4,000 crore for the entire banking sector. Such losses will directly impact their treasury income and overall profitability for the ongoing March quarter. Banks have reportedly urged the RBI to either relax the new regulations or extend the April 10 deadline to allow for a smoother transition and mitigate the immediate financial impact. Following the RBI's announcement, the rupee did show an immediate, albeit temporary, rebound. It opened strong on Monday, March 30, 2026, gaining as much as 1.4% and trading around ₹93.59-₹93.85 against the dollar, up from ₹94.81-₹94.85 on the preceding Friday. However, market analysts are skeptical about the long-term effectiveness of this measure. Many view it as a temporary relief, cautioning that the rupee's trajectory remains highly sensitive to global oil prices, the geopolitical situation, and foreign capital flows. The RBI's strategy also reflects an attempt to preserve its foreign exchange "war chest" by shifting from direct market intervention to regulatory tightening. Uday Kotak, a prominent Indian banker, described the action as an "unconventional policy action" reminiscent of former RBI Governor Bimal Jalan's playbook during the 1998 Asian crisis, highlighting the extraordinary nature of the current economic environment. The success of this intervention hinges on its ability to curb speculation without causing excessive market stress, but without addressing the underlying economic and geopolitical drivers, the rupee's vulnerability persists.

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