RBI moves to curb INR volatility through FX position caps

The INR depreciated 6.2% against the USD in the last six months, as pressure intensified from foreign portfolio outflows, climbing corporate USD demand, and global risk aversion, as per the Reserve Bank of India (RBI). Amid the Iran war, India saw foreign investor outflows of around USD 12 bn from equities and continued selling in debt markets. This prompted the country’s central bank to intervene with regulatory measures to curb the currency volatility.

RBI curbs currency speculation

The RBI capped banks’ net open positions (NOP) at USD 100 mn at the end of each trading day, requiring lenders to reduce outstanding forex positions by 10 April, to increase USD liquidity in the onshore market. The measures triggered a reduction in open positions ahead of the deadline, contributing to stabilization in the INR after it dropped to record lows of 95.2 / USD in late March.

Containing onshore-offshore build-up

The measures also targeted positioning imbalances between onshore and offshore markets, including restrictions on onshore banks’ participation in the non-deliverable forward (NDF) market. “We believe the RBI’s recent guidelines on limiting NOP in the onshore market, along with directives to onshore banks not to deal in the NDF market, are aimed at curbing the buildup of onshore-offshore positioning while giving the RBI greater control over USD/INR in the onshore market,” Manthan Shingala, Asia FX strategist at Nomura, told EnterpriseAM.

The shift has widened the onshore-offshore spread, with 12-month forward points rising to around INR 1.25 from about INR 0.2 earlier in March, while forward market volumes declined as positions were unwound. “We believe beyond the 10 April deadline, these volumes are likely to shrink further, making price discovery less efficient,” Shingala added.

Tactical intervention, not a shift

The RBI’s intervention is tactical — to ensure USD supply while containing volatility — without over-reliance on reserves, Charan Singh, formerly an economist at the International Monetary Fund and research director at the RBI, told EnterpriseAM. He said the move shows the central bank is deploying multiple tools to manage currency pressures, instead of relying only on forex reserves.

“The Monetary Policy Committee meeting [of RBI] gives some confidence that there is no structural shift in India’s currency management framework. These measures are not permanent and will be reviewed at an appropriate time,” Shingala said.

The measures come amid pressures from foreign portfolio outflows, higher corporate demand for USD, and elevated oil prices. By forcing a reduction in open FX positions, the RBI is effectively increasing USD availability onshore while limiting speculative positioning, Singh said.