- The big news for the Indian Rupee was new regulations announced by RBI after markets closed last Friday, to limit open positions for authorised dealers in onshore currency markets to US$100million each at the end of the trading day. Previously, the limit was set at 25% of each institution’s capital and importantly allowed netting by banks across both onshore and offshore markets.
- By limiting the positions to just gross onshore positions, the RBI seems to have targeted the popular trade where banks buy USD/INR onshore and sell USD/INR NDF offshore to benefit from the spread, in effect funded by onshore liquidity. These positions seem to be anywhere from US$30-40bn in total across banks according to reports and market participants. With the rules currently drafted to take effect on 10 April, banks and financial institutions will likely have to take some mark-to-market losses on these trades as these positions are unwound.
- In the near-term we would expect a tactical decline in onshore USD/INR (ie. INR stronger), wider NDF forward points vs onshore, and a compression in onshore implied yields, as banks attempt to close out positions absent subsequent relaxation on these rules by RBI.
- It’s interesting that the market initially traded this way with onshore USD/INR moving to as low as 93.40 levels but recovered back during the day to the 94.58 handle at the time of writing. It’s unclear what’s driving these moves but we note that many drivers are at play in markets right now including an escalation in the Iran conflict.
- Over the medium-term, we continue to think that the fundamental flow picture still points towards a weaker INR moving forward, especially if the Iran and Middle East conflict is prolonged and escalates further. While we think it makes perfect sense for the RBI to implement policies to try to break one-way bets on the INR, especially if USD/INR starts to reach levels which starts to push up inflation expectations and weaken financial stability, what needs to change for INR is a more sustained period of capital inflows. These flows have already been lacking before the Iran conflict (see India: Flows before growth – this time is different for INR)
- Last but not least, RBI's forward book has possibly risen meaningfully to a net short position of >US$100bn in March 2026 from US$67bn in January based on some media reports, and likely done to defend against INR weakness, even as spot onshore FX sales was likely lower at around US$10bn. With foreign currency assets closer to US$570bn after excluding US$131bn of gold reserves, the total usable reserves to continue defending INR moving forward is to be clear still sizeable, but perhaps less than the headline number suggest after incorporating the RBI’s large net short forward book.
- Overall, we continue to see INR as vulnerable and likely rising above the 95 levels if the Iran conflict is prolonged and oil prices continue to rise from the Strait of Hormuz closure. As we pointed out, this time around it’s not just about oil prices but also energy shortages, coupled with indirect effects including higher fertiliser and food prices, weaker remittances, disruption to travel and transportation, coupled with weaker trade with the Middle East for India (see India – Strait of Hormuz closure: Not just about oil prices for INR).
- Overall we as such see any fall in USD/INR as a good chance to buy on dips and for clients to hedge at better levels.
