BT Explainer: Why bank stocks are falling after RBI cap on net open rupee positions

Banking stocks declined on Monday after the Reserve Bank of India (RBI) tightened norms on how much currency exposure banks, licensed for foreign exchange business, can carry in the domestic market, triggering concerns over forced unwinding of positions and potential losses.

The RBI said banks must now ensure that their net open rupee positions in the onshore deliverable forex market do not exceed $100 million at the end of each business day, with compliance required by April 10, 2026. The move effectively narrows the flexibility banks earlier enjoyed, when they could maintain net positions across onshore markets, non-deliverable forwards (NDF) and currency futures up to 25 per cent of their capital. 

The change matters because many banks are believed to be positioned long on the dollar and short on the rupee, largely through proprietary and arbitrage trades.

"Earlier, banks’ boards set their own Net Overnight Open Position Limit (NOOPL/NOP), capped at up to 25% of Tier-I & Tier-II capital. RBI retained discretionary power to impose tighter limits during volatility. This self-regulated system had been in place since 2013," Systematix Shares and Stocks (India) noted.

Reason behind the fresh move

Saurabh Jain, Head of Fundamental Research, SMC Global Securities told Business Today that the move is aimed to curb excessive speculation and arbitrage-driven long-dollar positions, estimated at $30-40 billion industry-wide that were amplifying rupee weakness via onshore-offshore NDF spreads, thereby achieving better exchange rate management and stability. 

The move also limits NDF spillovers into the domestic market, making RBI’s own dollar sales more effective by reducing counter-productive speculation, Jain said.

Mark-to-market (MTM) losses

Jain said private banks with active treasury desks had relatively higher exposure than public sector banks. While the directive is supporting the rupee through forced dollar selling, banks face mark-to-market losses running into thousands of crores, impacting Q4 treasury profits, he said.

"This is not a surprise to bankers, as the Master Direction updated on September 22, 2025 had clearly stated that RBI may prescribe NOP-INR limits depending on market conditions," Jain said. 

Banks have thus requested a 2-3 month extension or grandfathering of existing positions to avoid rushed unwinding and disorderly losses at fiscal year-end.

According to Systematix, excess arbitrage positions could be in the range of $10-18 billion, with total outstanding bets potentially as high as $40 billion. 

If banks are forced to unwind these positions, they may have to sell dollars and buy rupees in the onshore market, a process that could crystallise losses, it said.

Key banks in forex market
While bank-wise exposure is not publicly disclosed, institutions with large treasury and forex operations are seen as more vulnerable to the shift. These include State Bank of India, HDFC Bank, ICICI Bank and Axis Bank, according to Systematix. The brokerage also noted that banks have approached the regulator seeking either relief or a phased implementation to avoid disorderly unwinding and large mark-to-market losses.

Bank stocks take a hit

Tracking the development, banking stocks saw broad-based declines. Union Bank of India dropped 3.16 per cent, Axis Bank fell 3 per cent, while Canara Bank, Kotak Mahindra Bank Ltd, Bank of Baroda, State Bank of India and Punjab National Bank declined over 2 per cent each. IndusInd Bank and Federal Bank also slipped about 2 per cent, while ICICI Bank Ltd and HDFC Bank Ltd fell up to 1.8 per cent.

Samir Arora of Helios Capital in a post on X said: "Just relax about this supposed Rs 4,000 crore loss on FX unwinding. Just in the past month the INR has depreciated by over 4%. All these positions would not have been set up for the first time at Friday 27th close. These banks would be in the money big time till now (which equity markets did not know for or account for) and now they will give up some of those profits. Big deal," said 

Arora said some of the bigger positions may have been taken by more aggressive foreign banks.

In a post on X, Deepak Shenoy noted that banks were perhaps betting recently on RBI doing dollar swaps to take out their excess dollar positions.

"RBI has done a few of these swaps recently. RBI sells dollars to meet demand in the market, but banks had possibly been buying for more than their client requirements, in order to eventually push RBI into another swap that would then give them rupees at relatively low interest rates (Even lower than repo, for a long term!)," he said.

Shenoy explained that if banks have a net open dollar position of a huge amount, and RBI does a swap, the bank gets the dollars back in three years, and rupees for the exchange that they pay less than 2.5 per cent for the rupees. 

"The bet turns very sour if the USDINR drops in three years, but the RBI in the last five years has fought off every rise in the rupee by buying dollars so it's an easy bet to take. The downside of a swap is that it introduces more rupee liquidity now at a time when inflation is likely to be higher, and is not useful," he said.