By Dalal Street Investment Journal (DSIJ)
The rupee strengthened on Monday after the RBI asked banks to cap their net open rupee positions in the onshore market at $100 million by day-end. The move is aimed at curbing volatility and supporting the currency. While it may offer near-term relief to the rupee, banks could face mark-to-market losses, lower trading flexibility and pressure on treasury income.
The Indian rupee has been under severe pressure in recent weeks. On March 27, 2026, it slipped to a record closing low of 94.8125 against the US dollar after briefly touching 94.84 intraday. The fall has been sharp: the rupee has declined around 4% since the Iran conflict escalated in late February and is down about 11% in FY26 as of March 27, 2026, making this its weakest fiscal-year performance in more than a decade.
That slide, however, was interrupted on Monday, March 30. The rupee rebounded strongly and moved below 94 after the Reserve Bank of India (RBI) announced a fresh measure aimed at containing speculative pressure in the currency market.
The RBI directed banks to keep their net open rupee positions in the onshore deliverable market within $100 million at the close of each business day, with full compliance required by April 10. The announcement immediately triggered expectations of dollar selling by banks as existing positions are unwound.
The Indian rupee weakened due to a mix of global and domestic pressures, not because of any one single factor:
The sharp rise in crude oil prices after the West Asia conflict intensified was a major trigger. Since India imports most of its crude oil, higher oil prices increase the country’s demand for dollars, which puts pressure on the rupee.
The US dollar also remained strong globally, creating additional pressure on emerging-market currencies such as the rupee.
Reuters reported that foreign investors stepped up their selling in Indian markets. Since the conflict began on February 28, foreign investors have sold a record net $12.14 billion in Indian equities and ₹152 billion in bonds under the FAR route, reducing dollar supply in the domestic market.
A weak export environment further added to the strain, as lower export earnings mean fewer dollars flow into the country.
Concerns over a widening current account deficit also hurt sentiment around the currency.
Rising hedging demand from importers added another layer of pressure, as more market participants rushed to secure dollars.
Overall, the rupee was hit by a classic external shock: higher oil prices, capital outflows, weak export support, and a stronger dollar all coming together.
The RBI has asked banks to cap their net open rupee positions in the onshore deliverable foreign exchange market at $100 million at the end of each business day.
To understand this, think of a bank’s net open position as its unhedged currency exposure after offsetting its dollar purchases and dollar sales. If a bank is carrying a large open dollar position, it stands to gain if the dollar rises further against the rupee. By forcing banks to sharply reduce such positions, the RBI is trying to cool a part of the pressure that builds up when market participants keep betting on more rupee weakness.
This is important because banks were reportedly running sizeable arbitrage positions between the onshore market and the offshore non-deliverable forward, or NDF, market. The RBI’s move effectively compels lenders to cut those exposures. As they do that, many are expected to sell dollars in the onshore market, which can temporarily support the rupee. Reuters reported that these arbitrage-linked positions may be as large as $25 billion to $50 billion.
The rupee strengthened because the market quickly understood the immediate consequence of the RBI’s directive: banks with large dollar positions may have to unwind them. That means selling dollars and buying rupees. Even before the April 10 compliance date, markets began pricing in early position cuts. That is why the rupee rallied nearly 1% on March 30.
In effect, the RBI has tried to alter the market’s near-term demand-supply balance. When a currency is weakening rapidly, even a technical regulatory step can change behaviour if it forces large players to cut leveraged or speculative positions.
The central bank’s objective is clear: slow the rupee’s fall, contain volatility, and prevent a disorderly drain on foreign exchange reserves. With oil prices elevated and the external environment hostile, the RBI appears to be signalling that it will not allow one-way speculative pressure to build unchecked.
This does not mean the RBI is defending a fixed exchange-rate level. Rather, it is trying to smooth market functioning at a time when the rupee is facing extraordinary external pressure. When a currency slides too quickly, the damage goes beyond the forex screen. Imported inflation rises, corporate hedging costs increase, and investor confidence weakens.
Banks are not opposing the intent of the move. Their concern is with the speed and cost of implementation.
According to Reuters, several banks have asked the RBI for a three-month transition period. Their argument is that an abrupt reduction in positions could force disorderly unwinding, increase volatility, and cause losses in treasury books.
The pain point is mark-to-market loss. If banks are made to exit positions at unfavourable exchange rates, those losses will show up immediately. That is particularly sensitive at quarter-end. The policy may also hit trading income because tighter caps reduce the flexibility banks have to exploit price differences between onshore and offshore markets.
There is another worry. If domestic banks are constrained more tightly, some trading activity may migrate offshore, especially to the NDF market. That could reduce depth in the local market and, in some circumstances, shift speculative pressure outside India rather than eliminate it. Reuters noted that traders expect volatility and wider spreads during the adjustment phase.
The RBI’s step can offer immediate relief by forcing dollar sales and checking aggressive positioning against the rupee. But it does not remove the underlying pressures that caused the rupee to weaken in the first place. If crude oil stays elevated, foreign investors keep pulling money out, and global risk aversion remains high, the rupee could again come under pressure.
In that sense, the measure looks more like a stabiliser than a cure. It can slow the fall, calm the market, and buy time. But the rupee’s medium-term direction will still depend on oil prices, capital flows, India’s external balances, and how long the geopolitical shock lasts.
The immediate focus will be on how quickly banks unwind positions and whether the rupee can hold on to its rebound below 94. Just as important will be the trajectory of crude oil, the pace of FII outflows, and the RBI’s broader stance in the forex market.
For now, the RBI has managed to send a strong signal: it is willing to lean against disorderly currency moves. That has given the rupee some breathing room. Whether that relief lasts is another matter.
SEBI Registered Research Analyst (INH000006396).
Founded in 1986, Dalal Street Investment Journal (DSIJ) brings decades of experience in India’s equity markets. DSIJ's research combines fundamental analysis with price action, guided by disciplined risk management and capital preservation. They follow a structured, data-driven approach designed to help investors and traders make informed decisions beyond short-term market noise.
Disclaimer :
Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.
The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.
BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.
Content Partner - Dalal Street Investment Journal Wealth Advisory Private Limited
This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
For more disclaimer, check here : https://www.bajajbroking.in/disclaimer
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading
