Banks Warn RBI: $100M Forex Cap Risks $18B Unwind, Hits Profits

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AuthorRiya Kapoor|Published at:
Banks Warn RBI: $100M Forex Cap Risks $18B Unwind, Hits Profits
Overview

Major Indian banks have asked the Reserve Bank of India (RBI) to ease a new $100 million limit on onshore foreign exchange positions. Banks warn that enforcing this cap by April 10 could force them to sell billions in existing positions, causing significant trading losses and hurting profits this quarter. While the RBI aims to slow the rupee's fall, the new rule might push hedging costs higher for others.

Banks Push Back on RBI's $100 Million Forex Position Limit

Indian banks are urging the Reserve Bank of India (RBI) to reconsider its strict new $100 million limit on net open foreign exchange positions within the country. Senior treasury officials met with RBI representatives over the weekend to voice concerns about the rule's immediate effects on bank profits.

They are requesting that the RBI allow the new limits to take effect later rather than immediately, and asked for a three-month period to reduce their current holdings. These existing positions are substantial, estimated to be between $250 million and $300 million for each bank.

RBI's Response to Weakening Rupee

The central bank introduced this cap as the Indian rupee has recently hit historic lows, trading around 94.81 against the dollar. The RBI's goal is to halt 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% of their total capital, a much higher allowance than the new cap.

Potential Market Fallout from the New Cap

If the $100 million limit is enforced as planned by April 10, Indian banks may be compelled to sell an estimated $10 billion to $18 billion in dollar holdings. This forced selling could lead to significant mark-to-market trading losses, which would be recorded in the current financial quarter (Q4FY26) and directly reduce treasury income.

The change is also expected to eliminate opportunities for banks to earn income from currency arbitrage. Additionally, it might encourage traders to place bearish bets on the rupee in offshore markets, where no such caps exist. This shift could increase currency hedging costs for foreign investors and widen the price differences between onshore and offshore forex markets, creating new challenges for treasury managers.

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