RBI’s March directive requiring banks to reduce onshore rupee net open positions triggered a sharp adjustment in foreign exchange trading books, while volatile currency markets, foreign investor outflows and elevated crude oil prices added to the pressure.

Indian banks incurred nearly $500 million in mark-to-market losses on their foreign exchange (FX) trading books during the first half of 2026 after regulatory changes introduced by the Reserve Bank of India (RBI) forced lenders to unwind or rebalance their positions. However, banks subsequently recovered around $400 million as market spreads widened and trading positions were normalised, according to research by Crisil Coalition Greenwich.

The episode highlights the challenges banks can face when regulatory requirements change rapidly during periods of currency volatility. It also underscores the importance of liquidity, risk management and market-making capacity in India's foreign exchange market, particularly when companies are actively seeking protection against currency fluctuations.

RBI’s $100 Million Net Open Position Limit Triggers Adjustment

On March 27, 2026, the RBI directed authorised dealer banks to cap their end-of-day onshore rupee net open positions at $100 million. Banks were required to bring their positions within the prescribed limits by April 10, creating a relatively short window for adjusting existing trading books.

A net open position represents a bank's exposure to currency movements after accounting for relevant offsetting positions. Such exposures can arise from transactions with corporate clients, financial institutions and other market participants.

The new limit required banks to reduce positions that exceeded the permitted threshold. According to Crisil Coalition Greenwich, the compressed implementation period forced lenders to unwind or rebalance exposures while the rupee was already experiencing volatility.

When several market participants seek to adjust positions within a limited period, transactions can become more expensive to execute. Prices may move sharply as available counterparties and balance-sheet capacity become constrained, potentially increasing mark-to-market losses on existing positions.

Banks Recover Part of the Losses as Market Spreads Widen

The research indicated that banks recovered approximately $400 million of the initial losses after foreign exchange market spreads widened and trading positions were normalised.

Market spreads represent the difference between the prices at which dealers are willing to buy and sell a currency. When uncertainty rises or dealers have less capacity to absorb risk, these spreads can widen, increasing transaction costs for market participants.

Following the RBI directive, tighter limits reduced banks' ability to hold currency risk on their own books and provide liquidity to clients. As dealers adjusted their pricing to reflect lower balance-sheet capacity and greater execution risks, wider spreads helped recover part of the initial losses.

The reported recovery should be distinguished from the original mark-to-market impact. The figures describe the changes reported by the research during the first half of 2026 and do not necessarily represent the final realised profit or loss of every individual bank.

Rupee Volatility, FII Outflows and Corporate Hedging Add Pressure

The regulatory changes coincided with several factors that were already putting pressure on the currency market.

Foreign investor outflows increased pressure on the rupee, while businesses continued to seek currency hedging to manage their exposure to international transactions. Corporate hedging demand can include forward contracts and other derivatives used by importers, exporters and companies with foreign-currency borrowings.

According to Crisil Coalition Greenwich, the short implementation period forced banks to adjust positions amid elevated rupee volatility, foreign-investor outflows and strong corporate demand for hedging.

The research also noted that restrictions on related-party derivatives limited the ability of some banks to offset exposures. This reduced flexibility made it more difficult for certain institutions to rebalance their trading books efficiently.

The RBI subsequently withdrew some of its earlier instructions on April 20 and permitted limited exceptions for related-party transactions, easing some operational pressure on banks.

Higher Crude Oil Prices Increase Currency Risks

Elevated crude oil prices were identified as another important source of foreign exchange volatility. India imports a substantial share of its energy requirements, making the country's external payments sensitive to changes in international oil and gas prices.

The research cited India's dependence on imported energy, estimating that the country imports around 85% of its crude oil requirements and 50% of its natural gas requirements.

When energy prices rise, the cost of imports can increase even if the volume purchased remains unchanged. Importers may consequently require more foreign currency to settle payments, potentially increasing demand for dollars in the domestic market.

Higher oil prices can also widen the trade deficit and place pressure on the rupee, depending on export earnings, capital flows and other components of the balance of payments.

These effects are not automatic or uniform. Currency movements also depend on global dollar strength, investor sentiment, domestic economic conditions and the RBI's market operations.

India’s Import Bill Rises 20% Between January and July

Crisil Coalition Greenwich reported that India's import bill increased by 20% between January and July 2026. Total imports reached $95.9 billion, the highest level since 2011, according to the research.

A rising import bill can increase the economy's requirement for foreign currency, particularly when the increase is driven by energy or other essential imports. If export receipts and capital inflows do not keep pace, the resulting external financing requirements can place additional pressure on the rupee.

For banks, these conditions can translate into greater demand for currency conversion, forward contracts and other hedging products. At the same time, heightened volatility can make it more difficult to price transactions and manage exposures within regulatory limits.

The combination of stronger hedging demand, uncertain currency movements and reduced capacity to hold open positions can therefore influence both trading costs and the availability of liquidity in the FX market.

Implications for Banks and Corporate Clients

The episode illustrates the close relationship between regulatory requirements and banks' ability to manage market risk. Position limits can constrain excessive exposure and influence the structure of the currency market, but changes may also require institutions to adjust existing positions rapidly.

For banks, effective risk management involves monitoring currency exposures, maintaining adequate controls and ensuring that trading strategies remain within regulatory requirements. The speed of implementation can also affect the costs associated with repositioning portfolios.

Corporate clients may experience the effects through wider bid-ask spreads, higher hedging costs or changes in the availability of particular transactions. Importers seeking to protect themselves against a weaker rupee and exporters managing future foreign-currency receipts may both be affected by changing market conditions.

The impact will vary according to transaction size, timing, currency exposure and the pricing arrangements offered by individual banks.

RBI Policy and Market Liquidity Remain Central

The RBI faces the task of balancing orderly currency-market functioning with measures intended to limit excessive risk-taking and volatility. Regulatory controls can affect how banks carry positions, while central-bank intervention and liquidity management can influence market conditions.

Crisil Coalition Greenwich noted that the rupee's future resilience would depend on RBI policy, a recovery in capital flows, global risk sentiment and India's ability to manage its structural dependence on imported energy.

The reported losses also demonstrate that the financial effects of a regulatory change can extend beyond the initial adjustment period. Banks may need to reassess their trading limits, hedging arrangements and capacity to serve corporate clients under revised rules.

Market Outlook

Indian banks' reported $500 million in first-half FX mark-to-market losses, followed by an estimated $400 million recovery, highlights the financial impact of rapid position adjustments during volatile currency-market conditions.

Going forward, developments in crude oil prices, foreign portfolio flows, corporate hedging demand and the RBI's regulatory approach will remain important factors for the rupee and the domestic foreign exchange market.

For banks, the focus will be on managing exposures within the applicable limits while maintaining efficient services for customers. For businesses, currency-risk planning and the cost of hedging will remain important considerations as global energy prices and capital flows influence India's external financial conditions.