RBI Forex Curbs Lift Rupee Briefly, Gains Fade Amid High Crude Prices

The Indian rupee recorded a short-lived rebound on March 30 after the Reserve Bank of India (RBI) introduced stricter limits on banks’ foreign exchange positions, but the currency pared most of its gains within hours, reflecting persistent external pressures, according to Bloomberg.

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The rupee initially strengthened by as much as 1.4% in early trade before trimming gains to around 0.3% during the session. The movement followed the RBI’s March 28 directive capping banks’ net open positions in the onshore currency market at $100 million per day, with compliance required by April 10, as per Bloomberg.

RBI Tightens Forex Position Limits

The central bank’s directive requires lenders to reduce large currency positions, effectively forcing them to unwind existing trades. Prior to this move, banks were allowed to maintain open positions up to 25% of their capital, according to Bloomberg.

The new cap comes amid sustained pressure on the rupee, which has weakened beyond the ₹94 per U.S. dollar level and declined nearly 4% since the start of the West Asia conflict, Bloomberg data showed.

Impact On Forex Markets And Banks

Following the RBI’s announcement, banks moved to cut arbitrage positions between offshore and onshore markets, leading to increased dollar selling in the domestic market. This is what caused the rupee’s initial appreciation, according to Bloomberg.

However, demand for the U.S. dollar from oil importers and ongoing volatility in global energy markets limited further gains. Brent crude prices remained above $110 per barrel on March 30, significantly higher than the RBI’s earlier baseline assumption of $70 per barrel in October, according to Bloomberg.

The adjustment in banks’ positions also affected financial stocks. Banking shares declined during the session, with broader indices reflecting selling pressure across the sector, Bloomberg reported.

External Pressures Persist

India’s foreign exchange reserves have declined in recent weeks as the RBI intervened to stabilise the currency. Bloomberg reported that reserves fell by over $30 billion in the first three weeks of March due to sustained intervention.

However, it is also true that the global market is affecting the currencies. Elevated crude oil prices and geopolitical tensions have increased India’s import bill and contributed to capital outflows. Foreign investors have withdrawn about $12 billion from Indian equities in March, while bond markets have also seen outflows of around $1.6 billion, according to Bloomberg.

The RBI’s move marks a shift toward regulatory measures to manage currency volatility alongside traditional market intervention tools.

The rupee’s movement on March 30 shows that even though there is regulatory tightening, other variables like energy prices, capital flows, and global risk sentiment also influence rupee movements.