Banks Seek Relief on Forex Curbs

India’s banking sector has approached the central bank seeking relaxation in newly introduced foreign exchange limits, as concerns grow over market disruption and potential losses. The forex position curbs India policy, aimed at stabilising the currency, is now facing pushback from lenders.

The move comes at a time when the rupee is under significant pressure due to global and domestic economic factors.

What the New Forex Rules Say

The central bank recently directed banks to cap their net open rupee positions at $100 million by the end of each business day, with compliance required by April 10.

Earlier, banks had more flexibility, with limits linked to a percentage of their capital. The new rule marks a major tightening of forex exposure norms, introduced for the first time in years.

The primary objective is to reduce speculative positions in the currency market and control volatility.

Why Banks Are Seeking Relaxation

Banks have requested either an extension of the deadline or exemptions for existing positions. They argue that immediate compliance could force a large-scale unwinding of positions worth $30–45 billion.

Such unwinding, according to market participants, could lead to significant financial losses and disrupt trading strategies built over time.

Lenders have suggested allowing existing trades to mature naturally rather than forcing abrupt closures.

Risk of Market Disruption

Bankers warn that rapid unwinding of forex positions could create liquidity issues and widen spreads between onshore and offshore markets.

“It is difficult to unwind the whole position in such a short span,” a market participant noted, highlighting the risk of reduced liquidity and pricing challenges.

Additionally, the move could affect arbitrage trades between domestic and offshore markets, which play a key role in maintaining market efficiency.

Why the Curbs Were Introduced

The new rules come amid sharp depreciation in the rupee. The currency has weakened significantly, approaching record lows against the US dollar.

This pressure is driven by rising oil prices, foreign capital outflows, and global geopolitical tensions.

By limiting open positions, the central bank aims to curb speculative dollar demand and stabilise the currency.

Balancing Stability and Market Functioning

The situation highlights a key policy challenge — balancing currency stability with market liquidity. While tighter rules can reduce volatility, they may also restrict normal trading activity.

Banks argue that a gradual transition would achieve the same objective without triggering sudden disruptions.