Opinion National Interest PoV 50-Word Edit

ThePrint On Camera Videos In Pictures

Society & Culture Around Town Book Excerpts Vigyapanti The Dating Story

More Judiciary Education YourTurn Work With Us Campus Voice

Opinion National Interest PoV 50-Word Edit

ThePrint On Camera Videos In Pictures

Society & Culture Around Town Book Excerpts Vigyapanti The Dating Story

More Judiciary Education YourTurn Work With Us Campus Voice

Why RBI’s regulatory intervention is the wrong way to defend the rupee

Viewed individually, each such intervention may appear to be a technical measure. Viewed together, they create four distinct and serious problems.

Imagine buying a five-year fire insurance policy for your factory. You pay the premium. The insurer prices the risk. Both sides sign a contract. A year later, a government regulator — concerned that too many insurers have written fire policies in a particular region — suddenly directs your insurer to reduce its exposure. In response, your insurer cancels part of your cover. Your factory is fine. You have not breached the contract. The insurer has not gone bankrupt. And yet, the protection you paid for has vanished — because the regulator abruptly changed its mind.

Most people would find this deeply unsettling. Yet this is exactly how state intervention works in India’s foreign exchange markets. 

Exchange-rate management normally involves the central bank participating in the foreign exchange market. However, in the last few years, the RBI has been using its regulatory powers to manage private actors’ positions in the USD-INR market. On 27 March, the Reserve Bank of India imposed a hard cap of USD 100 million on banks’ Net Open Position (NOP) in the onshore rupee market at the close of each business day. Previously, a bank’s permissible foreign exchange exposure was linked to its capital adequacy. 

The new circular overrode this entirely: regardless of a bank’s capital strength, it could no longer carry large directional positions against the rupee. Banks were given until 10 April to comply, which meant many had to unwind existing contracts — contracts that were perfectly legal until the day the circular was issued. Around the same time, press reports indicated that RBI officials had begun seeking information from banks about specific client positions and transactions.

This was not an isolated incident. In 2024, as part of its currency defence, the RBI had similarly directed banks to demonstrate underlying........

© ThePrint