RBI forex curbs 2026: Banks seek clarity on hedges

Why banks are asking RBI to “clear the air”

Banks are seeking clarifications from the Reserve Bank of India after the central bank tightened rules around foreign exchange derivatives, especially forward contracts. Bankers discussed the issue over the weekend and some also sent informal feelers to the RBI, according to people familiar with the talks. The concerns are practical rather than philosophical, centred on trade-linked hedging where cash flows can shift because of longer voyages, uncertainties, and delays in payments and cargo movements. Bankers argue the rules, intended to curb speculative pressure on the rupee, could create friction for genuine trades. An industry body is expected to formally raise these issues with the regulator. The Foreign Exchange Dealers’ Association (FEDAI) may reach out to the RBI for clarity.

The RBI’s key restriction: no cancelling and rebooking forwards

A major flashpoint is the RBI bar on corporates cancelling and rebooking forward contracts on the same underlying exposure. In normal risk management, companies often adjust hedges when shipment schedules shift or receivables get delayed. Treasuries also move between instruments, such as shifting from a forward to an option or changing tenor, to keep hedges aligned with actual exposures. Market participants say this flexibility is a core feature of genuine hedging, not speculation. Samir Lodha, MD of QuantArt, said genuine hedging requires flexibility and rollovers when cash flows are delayed or maturities extend. He also said allowing cancellation and switching to another option or forward is important for proper risk management.

ECB hedging is a specific pain point

Banks are also awaiting clarification on hedging external commercial borrowings (ECB). One example discussed by bankers is a five-year ECB where the forward contract used to buy dollars for servicing interest and repayment is typically only 12 to 18 months. Corporates generally roll such hedges over periodically to remain protected for the full borrowing period. Bankers said that since rollover involves cancellation and rebooking against the same ECB, the RBI could clarify how these transactions should be treated under the new approach. The fear is that a mechanical reading of the rule could leave long-dated liabilities under-hedged. This issue was specifically discussed among bankers.

Documentation and “underlier” concerns in forward bookings

Another operational issue relates to documentation. Banks typically do not insist on underlier documents, such as invoices and client emails, for booking forwards up to $100 million, even though corporates must have the papers. Participants indicated that tighter controls are being discussed to ensure the same underlying document is not reused for multiple forwards. While this can reduce misuse, bankers say it also adds process friction when trade terms change, especially during volatile logistics cycles. Companies facing shipment delays may need to modify hedge tenors or instruments quickly. A rule set that forces static hedges can increase risk rather than reduce it.

The NOP cap and the hit to basis-trade arbitrage

The RBI also moved to rein in onshore-offshore arbitrage that had built up through the ‘basis trade’. In a circular issued on Friday, March 27, 2026, the RBI mandated that authorised dealer banks must limit their Net Open Position (NOP-INR) to a maximum of $100 million by the end of each trading day. Banks were given a deadline of April 10, 2026, to comply. Previously, banks could set limits up to 25% of their total capital, which allowed larger positions, particularly at private and foreign banks. The cap effectively forced banks to unwind arbitrage positions such as buying dollars onshore while selling in the offshore non-deliverable forwards (NDF) market.

Offshore NDF restrictions and information-sharing friction

Alongside the NOP cap, the RBI barred authorised dealers from offering rupee NDFs to residents and non-residents, and restricted FX derivative transactions with related parties. Market participants said the combined effect has virtually restrained Indian banks from accessing NDFs by capping their net onshore open position. This also stopped corporates from shifting hedging activity from onshore to NDF markets. Bankers flagged a regulatory visibility gap: deals struck by offshore offices of conglomerates in London or Singapore may not be observable to Indian regulators. The RBI has proposed that multinational banks in India should share information on NDF positions taken by their overseas offices, but most foreign banks have opposed this.

What changed in the rupee after the RBI action

The policy response came after sharp rupee weakness. The rupee fell over 4% in March to a record low of 94.8150, described as Asia’s worst-performing currency this year amid heightened volatility linked to the ongoing conflict in West Asia. Following the RBI action, speculative positions were unwound and the rupee appreciated from recent lows near 95 to around 93.1 by early April 2026. Participants also noted that the cost of hedging, reflected in 1-month dollar/rupee NDF points, surged after the announcement, making it more expensive for banks to close positions.

Key facts at a glance

Market impact: stability objective versus hedging friction

The RBI’s intent is to curb unidirectional currency bets and stabilise the rupee by limiting speculative leverage and arbitrage channels. But bankers and hedging advisers argue the operational design matters because trade-linked exposures do not follow fixed schedules. If cancellation and rebooking are blocked without a rollover mechanism for genuine exposures, hedges can become mismatched to real cash flows. That mismatch can increase risk for importers, exporters, and borrowers servicing foreign currency debt. SBI research supported using forex reserves, described as over $100 billion, to deter speculative moves, and suggested the $100 million limit should ideally apply only to a bank’s trading book rather than the entire book.

What to watch next

Banks expect the industry, potentially through FEDAI, to seek clarifications from the RBI on ECB hedging rollovers and on how genuine trade-linked changes should be treated under the forward rebooking restriction. Separately, market participants will watch whether tighter onshore limits push more activity offshore, potentially reducing visibility into risk build-ups. The next meaningful milestone remains the April 10, 2026 compliance deadline for the $100 million daily NOP-INR cap, and any subsequent RBI guidance that addresses operational issues without diluting the intent to curb speculation.