The RBI pulled off a Dhurandhar move, complete with part-2 The Revenge, to stabilise a weakening rupee, reduce artificial demand for dollars, prevent speculative bets, and gain an upper hand in the Indian currency market.
Just like the blockbuster movie that set cash registers ringing, RBI's measures too felt like a thunderbolt, advancing the rupee by 1.8% to 93.10 on Thursday, which saw the biggest single-day appreciation in at least 13 years.
Coming to the plot, which has its own twists and sub-plots, the RBI introduced measures that were among the toughest in over a decade. It clamped down on banks' speculative bets against the exchange rate, which was putting untold pressure on an already weakening rupee.
Our protagonist, the rupee was having a harrowing time and has been Asia's worst-performing currency for some time now. Its woes stemmed from multiple issues, including the tariff war, persistent foreign capital outflows, and now the rising global crude oil prices. Put another way, the rupee's troubles were akin to demon king Ravana's head. You cut one, another appears.
Regrettably, the domestic currency fell 10% against the dollar in FY26—its worst annual rattle in over a decade. Further, it depreciated another 4% in March alone.
RBI has been trying to stem the rupee's slide by selling dollars. If in 2025 it sold $51 billion to contain volatility, last month it sold over $30 billion. Still, the central bank's traditional arsenal of dollar sales and interest rate adjustments wasn't helping. That's because the principles of demand and supply were not the sole bearers of pricing in the Indian currency market. Easy money and greed were playing up the currency scene.
Realising as much with a cold jolt of clarity, the RBI decided to go after banks' indulgence in what is called the arbitrage trade. But first, some basics on how banks were making money buying and selling dollars.
Banks buy all the dollars the RBI supplies in Mumbai (onshore market), making a bet it would rise. They also take positions in offshore markets like Dubai, Singapore and London, where they bet the dollar would fall. If the dollar rises, they earn in India and lose offshore. If the dollar falls, vice versa.
But how do they make money? The dollar is often priced higher in overseas markets than in Mumbai, and by holding dollars in India and betting against them abroad, they earn a risk-free profit. As of last Friday, ie, March 28, this business was pegged as high as $140 billion.
So last Friday, RBI shot off its first order capping banks' aggregate net open positions at $100 million by April 10, as against the board-driven limits of up to 25% of capital. What this means is, suppose if a bank has an arbitrage trade worth $500 million or $1 billion, that must now be reduced to $100 million by April 10.
Such forced selling was expected to temporarily increase dollar supply, strengthening the rupee. But winding up of dollar positions would also translate to losses for banks, which Jefferies pegged at over Rs 4,000 crore.
Over the weekend, speculation was high that RBI would tone down its own order as banks jockeyed for bargains. But the central bank stood its ground.
On Monday, when markets opened and as banks rushed to sell dollars, the rupee opened 1% higher at 93.58 as against its previous close of 94.80, while there was a bloodbath on Bank Nifty, which fell 4%. But within an hour of trading, the rupee was down in the trenches, touching a new low of 94.83 and briefly even crossed the psychological 95-dollar mark on March 30.
That's because emboldened banks felt that if you obey all the rules, you miss all the fun. Instead of going lock, stock, and barrel on dollar positions, banks discovered another avenue, turning to corporates, who stepped in to cover long dollar positions at a cost. So the rupee depreciated instead of strengthening and the RBI's move remained an unhappy adventure.
But the central bank was determined to fight its corner. Within the next 48 hours, it came back with Part-2, The Revenge as one may call it, closing every escape route for banks. On Wednesday, it issued a new set of rules ensuring that banks have no other way but to sell dollars. These include barring banks from offering any non-deliverable forward contracts (NDF) to corporates, banning the rebooking of cancelled forward contracts, and stopping forex deals with related parties to reduce circular trading.
By banning banks from providing rupee NDFs, which are often misused by large players, RBI stopped offshore-onshore arbitrage, closing the major speculative loophole. Likewise, it also banned re-booking of cancelled forward contracts to prevent repeated speculative hedges, where companies book a hedge at one price, but can cancel the old contract, book a small loss or gain, and re-book at a better rate. Lastly, the new rules also require proof that contracts are for real business needs, and not trading.
In summary, RBI closed multiple entry points for speculators. While it does prevent speculative bets, the downside is that foreign funds may be wary of investing in the Indian market due to the lack of hedging options.
All said, domestic banks have time till April 10 to offload their excessive long dollar positions, which means the rupee may remain supported for the next few days. But this alone may not ensure the rupee's future to be crisp and golden, particularly with global crude oil inching past $100 per barrel. In other words, what happens next will be a roll of the dice.
