It was an absolute bloodbath for the Nifty Bank Index and banking stocks today. The Nifty Bank Index fell 3.82%. Union Bank share price fell as much as 6.43%. This is after the announcement by the Reserve Bank of India capped net open position for banks (NOP) in the onshore forex market to $100 million per bank.
The brokerage house Jefferies noted that this action may support the rupee but banks could face mark-to-market (MTM) losses as earlier banks could manage positions up to 25% of their capital as approved by their boards.
RBI cap on banks’ forex positions, may hit Q4 profits
Large Indian banks such as SBI, ICICI Bank, HDFC Bank, and Axis Bank, along with foreign banks, dominate the forex derivative market. Typically, banks buy US dollars onshore at lower premiums and sell offshore at higher premiums to profit from spreads and add depth to the market.
Jefferies noted, if banks are forced to reduce NOPs to $100 million, it could trigger massive trade reversals. This may strengthen the Rupee against the dollar, potentially hitting bank profits in 4Q FY26.
“Every Rs1/US dollar movement on a $30-40 billion book can translate into a one-time loss of Rs30-40 billion for the banking sector,” said Jefferies.
Hedge funds and foreign banks could benefit from INR appreciation in offshore NDF markets.
“Appreciation of Rupee in the NDF market may lead to profits for hedge funds & foreign banks in the forex derivative markets,” Jefferies said.
Impact of market volatility on spreads
Jefferies noted that Banks manage their net open positions (NOP) daily, often offsetting onshore and offshore trades. Large exposures usually cancel each other, keeping net risk low.
However, Forex spreads between onshore and offshore Dollar-Rupee contracts tend to remain low during stable market conditions, usually in the 5-15 basis points range. However, periods of high volatility widen spreads significantly. In 2025, spreads rose to 30-50 bps due to US tariffs, and current geopolitical tensions and rising oil and gas prices have pushed them to 75-90 bps.
Conclusion:
Jefferies highlighted that RBI may consider that RBI may consider some leniency as many banks hold large positions worth $30-40 billion who are asking for leniency. Options include grandfathering existing contracts, applying limits only to new contracts, or extending the April 10 deadline. “It may also consider extending the time limit from 10-April to a furtherdate, the smoother the forex movement & MTM impact on banks,” Jefferies noted.