New Delhi: The Reserve Bank of India (RBI) has capped lenders’ net open positions in the rupee at $100 million at the close of each business day, tightening norms in the foreign exchange market to curb speculative activity and contain volatility in the domestic currency.
The directive, issued on March 27, will come into effect from April 10 and will be applicable to all authorised dealer banks. It supersedes the previous system wherein bank boards were free to fix their own limits subject to a maximum of 25 per cent of their capital.
The move is aimed at ensuring “orderly conditions in the foreign exchange market” and preventing excessive risk-taking by market participants. The central bank added that it retains the authority to impose such limits to manage exchange rate volatility and safeguard financial stability,” the RBI said.
The move comes at a time when the rupee has been facing persistent pressure, slipping to record lows amid global uncertainty, foreign fund outflows and rising crude oil prices. Market participants said aggressive speculative bets by some banks have also added to the recent sharp swings in the currency.
Net open position (NOP) refers to the difference between a bank’s foreign currency assets and liabilities. Large unhedged positions can amplify exchange rate movements, especially during periods of global market stress.
“The new cap may push large banks to cut back their forex exposures, which could help ease sharp intraday swings and curb arbitrage-heavy trades. The move is also being seen as a shift towards tighter central control, with the RBI taking back some flexibility that was earlier left to bank boards,” according to analysts.
This marks the first such restriction in more than a decade, highlighting the central bank’s growing concern over maintaining stability in the currency market.
While the curbs may weigh on trading volumes and profitability for banks’ treasury operations, experts believe the measure will help anchor expectations and ensure a more stable rupee trajectory.
The RBI’s action is part of broader efforts to manage external vulnerabilities and maintain macroeconomic stability amid an increasingly uncertain global environment.
