Indian Banks Face $500M Forex Losses After RBI Limits Positions

Indian banks experienced nearly $500 million in mark-to-market losses on their foreign exchange trading books during the first half of 2026. This financial impact followed a regulatory intervention by the Reserve Bank of India (RBI), which forced lenders to reduce their foreign exchange positions. Research from Crisil Coalition Greenwich highlights the sequence of events that led to the significant losses and the partial recovery that followed.

On March 27, 2026, the RBI implemented a directive that capped the end-of-day onshore rupee net open positions for authorised dealer banks at $100 million. This limit required banks to unwind or rebalance their foreign exchange exposures by April 10. The directive came at a challenging time marked by heightened rupee volatility, increased corporate demand for currency hedging, and significant foreign investor outflows from Indian markets.

As banks hurried to comply with the new restrictions, their trading books underwent sharp adjustments. The swift unwinding of positions contributed to the initial $500 million loss recorded on their FX portfolios. However, as market spreads widened in response to the changes, banks managed to recover about $400 million of the losses. This recovery was aided by dealers pricing in the increased balance-sheet constraints and execution risks associated with the new limits.

Nitin Agicha, vice-president of Market Structure & Technology at Crisil Coalition Greenwich, explained the situation, stating, "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." He noted that the tighter exposure limits restricted banks' ability to warehouse foreign exchange risk and provide liquidity in the market.

The report also pointed out that restrictions on related-party derivatives further complicated banks' efforts to offset exposures. Recognising these operational challenges, the RBI made adjustments on April 20 by allowing limited exceptions for related-party transactions. This easing helped reduce some of the pressure on banks and improved their capacity to manage FX risk.

Aamir Hazaria, director of Corporate & Investment Bank Competitor Research & Analytics at Crisil Coalition Greenwich, emphasized that the losses in the first half of the year were not merely a reflection of weaker client activity. He said, "First-half losses in FX were not simply the result of weaker client activity, but a short-term flip in trading due to RBI direction." This statement highlights how regulatory policy, rather than market fundamentals alone, played a critical role in the trading outcomes.

Another important factor influencing the volatility of the rupee and, consequently, banks’ foreign exchange positions was the rise in crude oil prices. India imports about 85 percent of its crude oil and roughly 50 percent of its natural gas, making energy costs a significant driver of currency fluctuations. Between January and July 2026, India's import bill increased by 20 percent, with total imports reaching $95.9 billion—the highest level since 2011, according to the research.

The combination of rising energy import costs and capital outflows added complexity to the rupee’s performance. The RBI's regulatory measures have helped contain some of the excessive volatility, but the currency's stability going forward will depend on several factors. These include continued RBI policy actions, the recovery of capital inflows, global risk sentiment, and India's management of its structural dependence on energy imports.

In the broader context, the foreign exchange market in India is a critical component of the country's financial system. Banks play a key role in providing liquidity and hedging solutions to exporters, importers, and investors. Regulatory changes that affect banks’ ability to manage foreign exchange risk can have ripple effects on the wider economy. The RBI’s intervention to limit open positions was aimed at safeguarding financial stability but also illustrated the delicate balance regulators must maintain between risk control and market functioning.

As India continues to integrate with global financial markets, monitoring the impact of regulatory policies and external economic pressures will be essential. The developments in 2026 serve as a case study in how central bank directives can influence market dynamics, trading strategies, and ultimately, the financial health of banking institutions.