Why the rupee’s fall may slow but volatility could rise

The rupee is likely to remain volatile with a stabilising bias, as a late-Friday directive by the Reserve Bank of India (RBI) is expected to trigger position unwinding even as elevated oil prices continue to weigh on sentiment.

The central bank has asked banks to cap their net open rupee positions in the onshore deliverable market at $100 million at the end of each business day by April 10, a move that could help arrest the currency’s recent slide by forcing traders to pare exposures.

The rupee had declined about 1% last week—its fourth consecutive weekly drop—to hit a record low of 94.84 per dollar, and is down around 4.2% so far this month, its worst performance in over seven years.

Why the RBI move matters

The directive changes how banks manage their currency books, particularly arbitrage trades between the onshore and offshore non-deliverable forward (NDF) markets.

Earlier, banks could run large positions as long as exposures were offset across markets. The new rule, however, caps onshore exposure independently, requiring banks to reduce positions even if they are hedged offshore.

This is expected to trigger unwinding of arbitrage trades, estimated by market participants at $10–18 billion.

While such unwinding could lead to dollar selling in the onshore market—supporting the rupee, bankers caution that the short compliance window may result in disorderly adjustments and potential losses.

“The market is likely to be volatile,” a trader at a state-run bank said, adding that concerns around closing arbitrage positions could keep the RBI active in both onshore and NDF segments.

Oil surge offsets support

Any near-term support from the RBI’s move is being countered by rising crude prices.

Brent crude futures rose 3% on Monday to nearly $116 per barrel and have surged more than 50% over the past four weeks amid the ongoing West Asia conflict.

For India, a major energy importer, higher oil prices increase dollar demand, adding structural pressure on the rupee.

Bonds feel the strain

The currency pressures and oil spike have also unsettled the bond market.

Indian government bonds logged their worst week in nearly four years, with the benchmark 10-year yield rising about 20 basis points to 6.94%—the biggest weekly jump since May 2022.

Yields are expected to trade in a 6.87%–6.95% range in the current week, which has only two trading sessions.

Rising oil prices, along with India’s decision to cut some fuel excise duties, have clouded the fiscal and growth outlook, further weighing on bonds.

Any relief ahead?

Some support may emerge from the government’s borrowing plan, with only about 51% of gross borrowing for FY27 set to be frontloaded—lower than market expectations of 53%–56%.

At the same time, overnight index swap rates have surged 55–69 basis points in the past four weeks, with markets pricing in more than two rate hikes, though some analysts see this as an overestimation of the impact of geopolitical risks.

What to watch

Key economic data due this week—including India’s industrial output and fiscal deficit figures, along with major US indicators such as payrolls and manufacturing activity—will be closely tracked for cues.

-With agencies inputs