Indian Banks Incur $500 Million Forex Losses Following RBI Net Open Position Limits

Commercial banks in India booked nearly $500 million (approximately ₹4,175 crore) in mark-to-market losses on their foreign exchange (FX) trading books during the first half of 2026, according to a research report released by Crisil Coalition Greenwich. The sudden hit was triggered by a regulatory directive from the Reserve Bank of India (RBI) that compelled lenders to compress their open currency positions on very short notice.

However, treasury desks managed to recover approximately $400 million (around ₹3,340 crore) of those initial losses later in the period as trading conditions adjusted, currency spreads widened, and book positions normalized.

Sudden Deadline and Trading Friction

The mark-to-market losses stemmed directly from the central bank’s directive issued on March 27, which capped authorised dealer banks’ end-of-day onshore rupee net open positions at $100 million. The regulator mandated that banks comply with this cap by April 10, granting lenders barely ten business days to unwind large-scale trading and arbitrage positions.

The forced liquidation occurred amidst difficult macroeconomic conditions, characterized by heightened rupee volatility, persistent foreign institutional investor (FII) outflows, and surging corporate hedging demand.

“The short implementation window for the new RBI rules forced banks to unwind or rebalance positions quickly at a time of elevated rupee volatility, foreign-investor outflows and heavy corporate hedging demand,” noted Nitin Agicha, Vice President of Market Structure & Technology at Crisil Coalition Greenwich.

Aamir Hazaria, Director of Corporate & Investment Bank Competitor Research & Analytics at the firm, added that the first-half trading losses were not the consequence of waning client activity, but reflected a sharp operational disruption sparked by regulatory directives.

Capacity Squeeze and Market Recovery

The stringent $100 million position threshold substantially compressed the balance-sheet capacity of authorized dealer banks, restricting their ability to warehouse currency risks and execute market-making functions for corporate clients. Additionally, earlier limits on related-party derivatives restricted the capacity of several banks—particularly foreign lenders operating in India—to hedge and offset exposures across inter-entity desks.

As dealers adjusted to the constrained environment, foreign exchange trading desks began pricing in lower balance-sheet capacity and higher execution risks. This dynamic led to wider bid-ask spreads, allowing banks to generate stronger unit margins on corporate client flows and recoup nearly four-fifths of their initial trading losses.

The central bank also provided operational leeway on April 20 by granting limited exemptions for related-party derivative transactions, mitigating trading frictions while keeping the core $100 million net open position cap in the onshore deliverable market intact.

Key Takeaways for Market Participants:

• Treasury Book Volatility: The rapid transition to strict position caps demonstrates the vulnerability of bank treasury earnings to abrupt shifts in capital and exposure rules.
• Elevated Hedging Costs: As banks maintain wider spreads to account for balance-sheet constraints, Indian importers and corporate hedgers face slightly higher transaction friction in currency markets.
• Macro Headwinds Persist: Higher global energy costs continue to exert underlying pressure on India’s current account, with the nation relying on imports for roughly 85% of its crude oil and 50% of its natural gas needs, sustaining demand for active risk management.

Tags: Reserve Bank of India Crisil Coalition Greenwich Banking Sector Indian Rupee Foreign Exchange