Reserve Bank of India Governor Sanjay Malhotra affirmed that the recent regulatory interventions in the foreign exchange market, including capping banks' net open positions, are temporary responses to current volatility and do not signify a permanent structural shift in the central bank's long-term commitment to market development.
Key Points
- RBI Governor Sanjay Malhotra clarified that recent forex market regulatory measures are temporary and not indicative of a structural policy shift.
- The $100 million limit on open positions is a reaction to specific market movements and will not remain in place permanently.
- RBI's intervention aims to smooth excessive volatility without targeting a specific exchange rate level, committed to judiciously containing disruptive movements.
- The rupee has gained 2.4 per cent since the new directions came into force, after declining over 4 per cent in March due to the West Asia conflict.
- RBI Deputy Governor T Rabi Sankar confirmed that the measures have not restricted foreign investors from hedging in domestic markets.
The recent regulatory measures to address volatility in the foreign exchange (forex) market, such as capping banks’ net open positions in the onshore deliverables market, are temporary and aligned with current market conditions, and do not signal any structural shift, Reserve Bank of India (RBI) Governor Sanjay Malhotra said at the post-monetary policy media briefing.
"Intervention in the forex market is aimed at smoothing excessive and disruptive volatility without targeting any specific level or band for the exchange rate.
"The RBI stands committed to this policy and will judiciously contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is warranted by fundamentals."
Temporary Measures for Market Stability
He said the $100 million limit on open positions is not intended to be permanent.
"These are reactions to specific market movements.
"In no sense do they signal any structural change.
"We remain committed in the long term to the development, broadening, and deepening of these markets through the internationalisation of the rupee.
"These are not measures that will remain in place forever," the governor said.
The rupee, which declined over 4 per cent in March following the West Asia conflict, has gained 2.4 per cent since these directions came into force.
On March 27, the central bank directed banks to restrict their daily net open forex positions to $100 million, superseding earlier frameworks that linked limits to capital levels. Compliance is required by April 10.
Hedging Access and Market Response
RBI Deputy Governor T Rabi Sankar said at the post-policy press conference that the recent measures have not restricted foreign investors from hedging in domestic markets, and all participants continue to have full access to hedging avenues.
He added that the central bank will closely monitor how markets respond.
Initially, the RBI had only asked for positions to be wound down by imposing limits.
However, after assessing market behaviour, it observed that while market makers and authorised dealers typically act responsibly and contribute to market depth, some positions were being shifted around instead of being reduced.
"As an initial step, we expected the signal to calm markets, but that did not happen.
"Positions were being reassigned, so we had to take further measures to contain them," he said, explaining the decision to bar banks from offering non-deliverable forward contra"cts to clients.
Rupee Appreciation and Bond Market Trends
The rupee has been on an appreciation streak for the past five trading sessions.
On Wednesday, the rupee appreciated 0.4 per cent against the dollar, supported by a two-week ceasefire between the US and Iran, dealers said.
The local currency settled at 92.58 per dollar, compared with the previous close of 92.99 per dollar.
The yield on the benchmark 10-year government bond witnessed its sharpest single-day decline since May 10, 2022, driven by a fall in crude oil prices, dealers said.
The benchmark yield settled at 6.9 per cent, compared with the previous close of 7.05 per cent.
Trading activity in the bond market also picked up, with volumes rising after a relatively subdued previous session when yields had hovered above 7 per cent.
"The decline in bond yields was largely driven by the ceasefire and easing geopolitical tensions rather than monetary policy.
"The policy itself was largely a non-event for the market.
"With clarity improving, participants who were earlier on the sidelines have started building positions, leading to higher volumes and yields moving to earlier levels," said a dealer at a primary dealership.
Monetary Policy and Global Factors
The first monetary policy of the current financial year (2026-27), announced on Wednesday, left the policy repo rate unchanged.
Brent crude price fell by nearly 14 per cent to $94.1 per barrel, while the dollar index was at 98.98, compared with 99.52 the previous day.
The dollar index measures the strength of the greenback against a basket of six major currencies.
