RBI fixes $100 million FX limit for banks; rush to unwind positions likely

The Reserve Bank of India has drawn a clear line on how much foreign exchange risk banks can carry onshore. In a move announced after market hours on Friday, the central bank capped net open positions at $100 million per day, with the rule coming into force from April 10.

Until now, banks worked with a capital-linked ceiling, which allowed them to scale positions depending on their balance sheet size. That route has been shut. The new rule puts everyone—large or small—within the same absolute limit.

That change matters because banks are not starting from scratch. Dealers estimate the system is sitting on $30–40 billion of onshore forex exposure. With less than two weeks to comply, desks will have to start cutting positions, and that usually means selling dollars in the local market.

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A big slice of these exposures comes from arbitrage trades—bets built on price gaps between onshore and offshore markets. These trades are typically low-margin but high-volume. Once the cap kicks in, carrying such large books becomes difficult. Rough estimates suggest $25–50 billion of these trades could come under pressure.

The concern on the Street is about the pace of adjustment. If too many desks try to exit at the same time, prices can move against them. That’s where mark-to-market losses come in—positions may have to be closed at levels that are not favourable.

This is not happening in isolation. Bond yields have been moving up, and banks have already been dealing with pressure on their treasury portfolios. Any hit from the currency side would only add to that strain.

Banks have informally sounded out the RBI, asking for more time. The request is for a three-month window so that existing trades can run their course. The worry is that a hurried exit could create a one-sided market, where everyone is trying to do the same thing at once.

Traders tracking flows say the risk is two-fold. One, a sudden wave of dollar selling could push the market out of balance for a while. Two, liquidity could tighten if positions are unwound too quickly. Neither outcome is ideal in a market that depends on steady two-way flows.

A slower glide path would allow books to shrink naturally as trades mature. That would mean less stress on pricing and fewer forced losses.

For now, desks are preparing for adjustments. Whether the central bank offers any leeway or sticks to the timeline will decide how smooth—or sharp—the transition turns out to be.-