What is RBI's fight with forex markets all about?

The US-Iran conflict's escalation in Feb 2026 put the Indian rupee under sharp pressure-it declined 4% and breached the 95 mark against the dollar. Usually RBI tackles volatility by selling dollars, but this time it cracked down on what it described as 'excessive speculaton'-bets against the rupee in India and abroad, and took measures to reshape the foreign exchange market itself.

How did RBI take on forex market players?

RBI capped banks' net dollar positions at $100mn, forcing them to offload excess holdings into the market. It also blocked a key source of speculation by barring banks from offering hedging contracts in offshore non-deliverable forwards (NDFs). These are trades in centres like Singapore or London where participants bet on the rupee's future level without actually holding it, settling gains or losses in foreign currency.

These restrictions halted arbitrage between onshore and offshore markets. RBI also banned 'churning', where contracts are repeatedly cancelled and rebooked to profit from small price differences. Banks were given until April 10 to unwind such positions.

Why did RBI do this?

Bets against the rupee via NDFs weakens offshore pricing and creates arbitrage opportunities between Indian and offshore markets.

This transmits pressure onshore, prompting banks and corporates to buy dollars defensively or to take advantage of the price difference, which in turn weakens the rupee further, making the bets self-fulfilling.

What was new?

RBI's first-time prohibition on banks from facilitating rupee-linked bets via NDF markets was a reversal of its earlier push to bring offshore trading onshore, including at GIFT City.

Why are banks unhappy?

The abrupt rules forced banks to unwind positions at unfavourable prices, leading to estimated losses of Rs 2,500-4,000 crore. The $100mn cap triggered simultaneous dollar selling, disrupting treasury operations and eroding a key source of fee and trading income from corporate clients.

How is this linked to the Impossible Trinity theory?

The 'Impossible Trinity' in international economics states that a country cannot simultaneously maintain a stable exchange rate, independent monetary policy, and free capital movement. Here, RBI chose exchange rate stability and monetary autonomy, sacrificing some degree of capital mobility by restricting speculative bets.

Does this mean capital controls?

There are no direct restrictions on capital inflows or outflows. However, by curbing speculative and hedging-linked liquidity in forex markets, RBI effectively tightened some channels through which capital-like flows influence the currency.

Did banks act illegally?

No. These were standard, permitted strategies. However, once RBI imposed new rules and deadlines, continuation of such positions became non-compliant.

Why a second warning?

RBI found some banks enabling corporates to benefit from arbitrage in the NDF market. A follow-up directive closed this channel too.