Bankers see losses from RBI capping open FX positions; Rupee seen sharply higher on Monday

The RBI’s announcement on Friday, March 27, evening, telling banks to bring down their onshore open positions to $100 million, will force banks to unwind their positions, causing mark-to-market losses, say bank treasury heads.

The move by the RBI is probably triggered by the fact that the rupee has slid sharply in March, and the fall on Friday from 93.98 to 94.7/$ was particularly rapid.

The Friday evening rule will require banks to bring down their long dollar positions in the onshore market, which some dealers guess could be as high as $40 billion. Banks don’t deliver on their buy or sell positions in the offshore market. It’s a non-deliverable market and is hence cash settled.

Also read: Banks Urge RBI to Relax New Rules as $30 Billion Unwinding Looms

So if the dollar-rupee reference rate falls to say Rs93.5/$ in the onshore market on Monday because of banks selling their long positions, while the offshore contract was at 94.50/$, then one rupee would be the loss per dollar position.

If the total open position is indeed as high as $40 billion, as some bankers say, the loss for all banks put together (foreign, private and PSU) would be Rs 4,000cr. Being year-end and the last working day, banks may have to account for the loss in the current year. It’s not clear if they can carry forward the loss to next year since they have until April 10 to wind down their positions.

Also, the RBI cap applies only to banks. Clients can also hold FX positions in their books, and bankers may be speaking to their corporate clients to take some of their positions for a fee.

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Bankers are believed to have had calls with the RBI on Saturday, where they argued hard for some relaxations to the  $100 mln rule. Some are still hoping RBI will soften and announce some tweaks by Monday morning. The most optimistic ask is that the RBI allows grandfathering of the current positions and imposes the limit prospectively. The less optimistic hope is RBI gives banks 1-3 months to reduce their positions.

The argument that the NDF market casts a huge pressure on the onshore market, especially during tough times, was a view the RBI subscribed to for several decades. It was only in June 2020 that banks with a unit in the International Financial Services Centre (called IBUs) were permitted to trade in the offshore Rupee NDF market.

In 2023, RBI expanded the market by allowing banks with IBUs to offer Non-Deliverable Derivative Contracts (NDDCs) to resident Indians for hedging purposes.

Thus, banks were gradually, over the years, allowed to operate in both markets, though many old-timers disapproved on fears that the NDF is an opaque market and tough for the RBI to control.

In fact, the Usha Thorat Task Force on Offshore Rupee Markets, which submitted its report to the RBI in August 2019,  recommended that Indian banks should not be allowed to deal in the offshore Non-Deliverable Forward (NDF) market.

Despite permitting banks to operate in the NDF market from mid-2020, the RBI had placed informal restrictions in October 2022 and August 2023 because of global pressures. But these restrictions were removed in 2024.

It now appears that the year-long pressure on the rupee, especially the intense pressure in March, has upended RBI’s efforts to liberalise and build a connection between the onshore and offshore markets.