New Delhi

The Reserve Bank of India’s recent move to tighten foreign exchange exposure norms for banks could weigh on their near-term earnings, even as markets expect some regulatory relief, according to a report by Jefferies.

The central bank has capped banks’ net open position (NOP) in the onshore forex market at USD 100 million, replacing the earlier board-approved limits of up to 25 per cent of capital. The move is seen as a response to the sharp depreciation of the rupee and the widening gap between offshore non-deliverable forwards (NDF) and the onshore market.

While the measure may help stabilise the rupee, the report warned that banks could face short-term financial strain due to the forced unwinding of existing positions.

Jefferies noted that banks may need to reduce large forex positions—estimated at USD 30–40 billion—by April 10, which could result in mark-to-market (MTM) losses in the fourth quarter.

The tightening comes amid increased volatility in currency markets, driven in part by the ongoing West Asia conflict and rising oil and gas prices. Spreads between offshore and onshore markets, typically in the range of 5–15 basis points, have widened significantly to 75–90 basis points.

Banks with large forex derivative exposures, including major domestic and foreign lenders, are expected to be most impacted. The report estimates that even a ₹1 movement in the rupee against the US dollar on such large positions could result in one-time losses of ₹30,000–40,000 crore for the banking sector.

However, there are indications that the RBI may adopt a more flexible approach in implementation. According to the report, discussions with banks suggest the possibility of “grandfathering” existing contracts while applying the new limits only to fresh positions.

Regulators may also consider extending the April 10 compliance deadline to ease the transition and reduce the immediate financial impact.

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The situation remains a key monitorable for the banking sector, with the extent of regulatory relief likely to determine the overall earnings impact in the near term.