India has been pushing for greater internationalisation of the rupee | Photo Credit: desifoto

The rupee has been under sustained pressure against all major currencies in the last couple of months, with increasing global uncertainties and the West Asia crisis adding to the strain. In response, the RBI has intervened heavily, reportedly selling over $30 billion in the spot market to defend the rupee — but with limited success. This appears to have prompted a shift in strategy. The RBI has now effectively barred Indian banks from taking positions in the offshore non-deliverable forward (NDF) market and imposed a $100 million daily cap on their net open forex positions onshore, effective April 10. In effect, this amounts to a form of soft capital control. These measures seem to have had some immediate stabilising effect on the rupee.

But that does not mean the strategy will work. If anything, it is likely to backfire, exacerbating the very problems it seeks to address.

The first problem is structural. A large — and rapidly growing — share of rupee trading now happens offshore, in centres like Singapore and London, which lie beyond the RBI’s regulatory reach. Singapore alone accounts for roughly $57.6 billion in daily rupee trading, while London handles about $59.9 billion compared to onshore trading volumes of $70 billion or so.

In simple terms, offshore trading volumes are substantially higher than onshore volumes, and are increasing steadily. This means the RBI cannot prevent bets against the rupee by acting only on domestic participants. It can restrict speculative activities within India. The pressure does not disappear — it simply moves offshore.

The second issue is how the two markets are linked — and what happens when that link is disrupted. Until now, Indian banks have acted as a bridge between onshore and offshore markets. They would buy in one market and sell in the other, capturing arbitrage opportunities. This was not just a source of profit — it was a stabilising force that kept exchange rates aligned across markets and limited distortions.

By cutting off banks from offshore markets and capping their onshore positions, the RBI is effectively breaking this link.

The result is predictable: wider gaps between onshore and offshore exchange rates, thinner liquidity in domestic markets, and weaker price discovery. In trying to curb speculative activities, the RBI may end up increasing inefficiencies and volatility within the system.

In other words, this is not just intervention — it is market distortion.

MTM losses

There is also a direct cost. Banks that built positions under a previously permitted framework are now being forced to unwind them. That is expected to lead to short-term mark-to-market (MTM) losses — estimated in market circles at ₹4,000-5,000 crore — and a hit to treasury income.

More importantly, it raises a deeper issue: regulatory certainty. When rules change abruptly, and previously allowed activities are suddenly curtailed, it undermines confidence in the policy environment. That has implications not just for banks, but for the broader financial system. Then there is the signalling effect. Such measures signal that the RBI is willing to intervene in a heavy-handed and unpredictable manner. That does not necessarily deter speculation — especially in offshore markets where the RBI has no control. If anything, it may encourage it.

Market participants may read these actions as a sign that the rupee is under serious stress, prompting more aggressive bets against it — particularly in offshore markets that remain unaffected by these restrictions. The longer-term implications are difficult to ignore.

Reduced participation by Indian banks will lower liquidity in the onshore forex market and raise hedging costs for Indian companies exposed to currency risk. At the same time, regulatory uncertainty can weigh on investor sentiment and discourage capital inflows, further pressurising the rupee. There is also a strategic contradiction. India has been pushing for greater internationalisation of the rupee. But measures that fragment markets and push activity offshore move in the opposite direction.

The effectiveness of RBI’s currency measures must ultimately be judged by their impact on market functioning. In this case, restricting domestic participants while leaving offshore markets untouched risks reducing liquidity, widening price differentials, and weakening the link between onshore and offshore exchange rates.

It may also shift risk-taking to jurisdictions beyond the RBI’s oversight rather than containing it. A more sustainable approach would focus on strengthening onshore market depth and ensuring stable, predictable policy conditions. Without that, the current strategy is unlikely to deliver durable stability for the rupee. That calls for an urgent rethink.

The writer is a business economist and CEO, Indonomics Consulting Private Ltd

Published on April 22, 2026