Bank Nifty Falls 2.5% Amid RBI Crackdown on Forex Speculation

Bank Nifty Index Declines by 2 Percent Following RBI Directive

Key Figures:

• 2%: decline in Bank Nifty index
• $100 million: net open rupee position limit for banks
• 4%: decline in rupee value in March
• 95.15: one-month USD/INR forward price on Friday
• 94.13: one-month USD/INR forward price on Monday

Market Analysis

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The Bank Nifty index declined by 2% on Monday after the Reserve Bank of India (RBI) directed banks to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day. The directive, issued on Friday, requires compliance by April 10.

All 14 constituents of the Bank Nifty index were trading in the red, with AU Small Finance Bank being the top laggard, declining 2.5% to Rs 860.2 per share on the National Stock Exchange (NSE). Heavyweight financials, banks, private banks, and PSU lenders fell by 2-2.5%.

The decline followed the RBI's move to tighten limits on banks' foreign exchange positions, triggering selling of dollars in the onshore market as traders rushed to cut arbitrage positions. Market participants expect the move to lead to unwinding of such positions, where banks profit from price differences between offshore non-deliverable forwards and onshore forward markets.

Economic Impact

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The unwinding of positions is likely to push banks to sell dollars in the domestic market, strengthening the rupee. The one-month USD/INR forward was last quoted at 94.13, down from around 95.15 on Friday. The curbs come at a time when the rupee has weakened more than 4% in March amid global volatility linked to the war in the West Asia.

Industry Reaction

Banks have sought more time from the RBI, requesting a three-month window to comply, citing concerns that a rapid unwinding of positions could result in losses. Some participants are still expecting relaxation from the RBI, which could lead to further decline in the USD/INR. The RBI has also been intervening in the foreign exchange market to contain volatility in the rupee.