India's Reserve Bank of India has implemented its boldest currency support measures in a decade, but the strict regulatory approach has created unintended consequences. On March 30, trading in offshore currency markets jumped to about $7.54 billion as Indian companies quickly exploited price gaps created by the RBI's intervention. According to Fitch Ratings, banks are facing immediate profit hits with estimated sector-wide losses from unwinding positions between ₹40 billion and ₹50 billion. The situation highlights how quickly markets can find new profit opportunities, questioning the effectiveness of single regulatory actions.
The intervention measures began in late March when the RBI capped banks' daily currency positions at $100 million by April 10, sparking a scramble to unwind at least $30 billion in arbitrage trades. As reported by Bloomberg, when that failed to halt the rupee's slide, the central bank extended curbs to offshore derivatives, barring lenders from offering non-deliverable forwards that allow investors to bet on the currency without holding it. Officials were targeting investors using NDFs to build short rupee positions and banks running arbitrage trades to profit from price gaps. However, the RBI's measures have created unexpected opportunities for corporate arbitrage, with companies actively buying dollars to exploit the price gaps. Since the curbs, the rupee has gained more than 2% to 92.59 per dollar as of Friday, but this has come at significant cost to banks and investors.
The tighter controls and abrupt announcement have raised concerns about policy predictability and transparency among international investors. The rupee has experienced dramatic volatility, tumbling past 90, 91, 92, 93, 94, and 95 per dollar in quick succession in March, with officials targeting investors using NDFs to build short rupee positions and banks running arbitrage trades to profit from price gaps. Foreign Portfolio Investors (FPIs) sold $12.7 billion worth of Indian shares in March, the highest monthly figure ever recorded. Hedging costs have jumped significantly, with offshore 12-month forward points reaching their highest level since 2013, while onshore costs hit the highest since 2022. Foreign investors have cut almost $1 billion from their holdings of index-eligible bonds, reflecting reduced confidence in the market environment.
Despite the rupee's volatility, the World Bank has raised India's GDP growth forecast by 30 basis points to 6.6% for fiscal year 2027, citing India's strong economic buffers. Aurélien Kruse, World Bank's Lead Country Economist for India, praised the RBI's exchange rate management as "very consistent" and noted that India entered the West Asia crisis "from a position of very strong buffers and very strong ability to withstand the shock." The World Bank expects India's GDP to grow 7.2% in 2027-28 and 7% in 2028-29, with growth forecasts upgraded due to India signing trade deals with the European Union and US, along with "incredibly strong" growth prints for July-September and October-December 2025. However, the World Bank's inflation forecast of 4.9% is 30 basis points higher than the RBI's projection of 4.6%, with the key difference being the World Bank's assumption of crude oil prices at $90-100 per barrel for 2026-27 versus the RBI's $85 per barrel assumption.
Market participants are reassessing risks of operating in the Indian market following the sudden policy shifts. As reported by Bloomberg, two senior foreign bankers said clients had questioned the RBI's seemingly arbitrary move, with some foreign investors indicating they may stay away from India even after current uncertainties ease. Jefferies estimates banks could face losses of up to ₹5,000 crore ($539 million) from the forced unwinding, while State Bank of India, the country's largest lender, had about $5 billion in such positions and expects losses of around $32 million. A senior executive at a European bank stated it would be difficult to return to the NDF market even after the RBI lifts restrictions due to heightened perception of regulatory risk, with participation potentially taking years to recover. The Finance Ministry has reached out to external experts for stabilization ideas, reflecting government concerns about foreign institutional investor participation.
