The Reserve Bank of India has implemented its most aggressive push in nearly a decade to stabilise the rupee, directing domestic banks to unwind bearish positions in both onshore and offshore markets. According to reports from The Times of India, these measures came without immediate clarification, unsettling lenders and investors who were left uncertain about the central bank's intentions. The rupee has rebounded more than 2 per cent to 92.59 against the dollar as of Friday following these restrictions, though this recovery has come with significant side effects. In his first public comments on the matter, RBI Governor Sanjay Malhotra stated that the measures are temporary and do not represent a fundamental shift in the central bank's commitment to market deepening, assuring that the restrictions would not remain in place forever. As reported by Bloomberg, the measures started in late March when the RBI imposed a cap on banks' daily currency positions at $100 million to be enforced by April 10, triggering a rush to unwind roughly $30 billion worth of arbitrage trades.
Banks could face losses amounting to hundreds of millions of dollars, as estimated by Jefferies Financial Group Inc.. According to Bloomberg, Jefferies estimates banks could face losses of up to ₹50 billion ($539 million) from the forced unwinding of their positions. State Bank of India, the country's largest lender, had about $5 billion in such positions and expects losses of around $32 million. The steps were set in motion in late March when the RBI imposed a cap on banks' daily currency positions at $100 million to be enforced by April 10, triggering a rush to unwind roughly $30 billion worth of arbitrage trades. As reported by Multibagg AI, banks are facing potential losses of up to ₹139 million from the forced unwinding of their positions, with State Bank of India alone reported to have around $1 billion in such positions with expected losses of approximately $12 million.
The sudden nature of these measures and tighter controls risk creating an impression that India may be stepping back from efforts to deepen integration with global financial markets. As reported by The Times of India, economists at BofA Securities Inc. cautioned that such actions could undo years of liberalisation aimed at preventing a repeat of the 2013 episode. The measures essentially break the link RBI had cultivated in the last decade, with experiences from China and Malaysia highlighting the risks of similar interventions. According to Bloomberg, foreign investors have slashed their holdings of index-eligible Indian bonds by almost $1 billion, while equity outflows in March reached $12 billion amid heightened global risk. The intervention has also created uncertainty about policy predictability, with analysts noting that foreign investors need a reliable and predictable investment framework to maintain or increase their portfolio allocations to India. Prashant Singh, a senior portfolio manager for emerging-market debt at Neuberger Berman Group LLC, said India's onshore yields are becoming more attractive, but the external environment and recent regulatory steps have added to the uncertainty and increased currency hedging costs.
The RBI's swift action comes against a weakening external environment marked by higher US tariffs and a surge in energy prices following the Iran conflict, challenging an oil-importing country with a persistent current account deficit. According to The Times of India, elevated crude prices have pushed up the import bill, while a global shift toward safe-haven assets has strengthened the dollar. As reported by Bloomberg, a two-week US-Iran ceasefire may offer some relief, though the currency pressure isn't likely to dissipate soon given the war situation. Rising crude has inflated the import bill, while a global flight to safety has boosted the dollar. Hedging costs have surged, with 12-month forward points reaching their highest levels since the 2013 taper tantrum, making it more expensive and difficult for genuine investors to protect their exposures. The episode highlights the classic central banking dilemma: choosing between currency stability and maintaining an open, predictable market.
RBI Governor Sanjay Malhotra emphasised that the central bank continues to focus on developing currency markets and advancing the internationalisation of the rupee, adding that recent measures should not be seen as a change in policy direction. The Finance Ministry has consulted external experts for suggestions to stabilise the rupee, reflecting government concerns about foreign institutional investor caution. According to Bloomberg, the Finance Ministry has reached out to external experts for ideas to stabilize the rupee, according to a person with knowledge of the matter. This reflects the government's worry that foreign institutional investors may stay on the sidelines if depreciation risks increase. BofA Securities Inc. economists warned that the recent measures risk rolling back a decade of liberalization authorities have pursued to avoid a repeat of 2013. Former Securities and Exchange Board of India board member Ananth Narayan said there's been a substantial build-up of bets against the rupee over the past two years, some for hedging but others likely speculative. Soumya Kanti Ghosh, chief economic adviser at State Bank of India, said the measures are likely to create a wedge between offshore and onshore markets, potentially creating a 'vicious loop' of rising offshore premiums.
