RBI’s forced dollar unwind to keep rupee from sliding, bruise banks

MUMBAI: The RBI’s unorthodox move to steady the rupee by forcing banks to unwind foreign exchange positions beyond $100 million will prevent its slide towards 95, even as markets fret over a possible escalation in the Iran conflict and the prospect of a US ground invasion.

The move will also cause banks with large open positions to lose money. Over the weekend, banks pressed RBI to either relax or grant more time. With RBI standing firm, banks will have to start unwinding on Monday to meet the April 10 deadline.

Until Friday, banks could run net open positions of up to 25% of their net worth. In practice, large lenders often accumulated sizeable long dollar bets, sometimes in excess of of $1 billion, on expectations of rupee depreciation. The new cap forces a rapid reversal. By April 10, 2026, banks must cut these exposures to $100 million. This compels them to sell dollars and buy rupees to close the gap.

Uday Kotak, called the move “an unconventional policy action” triggered by a West Asia crisis that has entered “uncharted territory”. “Reminds me of Bimal Jalan play book as RBI Governor in 1998 when the rupee was depreciating sharply post Asian crisis. If things get worse geo politically, is there an opportunity for a new version of FCNR (B) scheme?” he said.

Some bankers are sceptical of special schemes to raise dollars. Earlier dollar mopping exercises relied on offering guaranteed returns to non-resident Indians, who borrowed cheaply abroad and parked funds in India. Such tactics may be less effective now. Investors have access to a wider array of structured products, and it is cheaper for the RBI to raise dollars through rupee dollar swaps, bankers said.

Despite the RBI move pressure persists as dollar is expected to gain globally due to geopolitical tensions rise and fuel inflation fears and FPIs selling across markets. “FPIs were net sellers on all trading days in March, so far, taking total selling through March 27 to a record Rs 1,18,093 crore,” said VK Vijayakumar. The key drivers are the West Asia conflict, Gulf remittance-risk, hit to growth and earnings from high crude prices.