The Reserve Bank of India’s recent tightening of foreign exchange exposure norms could emerge as a negative surprise for the banking sector. The RBI has capped banks’ forex net open position (NOP) at USD 100 million, a move that caught the sector off guard, said brokerage firm Jefferies.
The move came on late Friday evening after the Indian rupee suffered one of its sharpest single‑day falls in recent months on Friday, sliding nearly a rupee to hit a fresh lifetime low of 94.85 against the US dollar.
According to Jefferies, the tighter restriction could force banks to unwind an estimated USD 30–40 billion worth of forex positions, setting the stage for mark‑to‑market losses in the fourth quarter of FY26. The brokerage estimates that for every one‑rupee move in the USD‑INR exchange rate, the sector could face losses of Rs 3,000 crore to Rs 4,000 crore.
Jefferies notes that the widening gap between onshore and offshore markets, now at roughly 75 to 90 basis points, has also played a role. However, the abrupt curbs disrupt common arbitrage strategies, particularly trades that involve buying dollars in the onshore market and selling them offshore. Large private banks and foreign lenders, which carry the highest proportional forex exposures, are the most vulnerable under the new framework.
Exposure levels across the system highlight the scale of the challenge. Public sector banks collectively carry contingent forex liabilities of about Rs 43 lakh crore, equivalent to roughly a quarter of their total assets.
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Compiled by ET Now Bureau
Foreign banks emerge as the most exposed segment, with contingent forex liabilities running more than thirteen times their asset base overall. Standard Chartered, DBS Bank India, JPMorgan Chase and Deutsche Bank India each report forex contract positions exceeding ten times their respective assets, underscoring their vulnerability to abrupt position unwinds. In contrast, small finance banks remain largely insulated, with negligible exposure to forex contracts.
While Jefferies acknowledges that forced unwinding of positions could lend near‑term support to the rupee, it said that hedge funds and overseas players may turn this dislocation to their advantage in the non‑deliverable forward (NDF) markets.
Banks, meanwhile, are seeking regulatory relief. Market participants expect the RBI to consider grandfathering existing contracts and possibly extending the April 10 compliance deadline, a step that could soften the immediate financial impact. Until clarity emerges, however, Jefferies believes the policy shift keeps banking stocks exposed to earnings volatility and downside risk.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
