| The RBI cut the threshold for forex derivative transactions without underlying exposure from $100 million to $5 million and barred rebooking cancelled rupee derivative contracts.
A new 20 per cent foreign exchange risk reserve on eligible derivative contracts exceeding $2 million is expected to put pressure on banks’ NIMs. The daily CRR maintenance floor will rise from 90 per cent to 99 per cent from October 16, restricting banks’ flexibility to deploy funds in higher yielding short term assets. The RBI’s dollar window for three PSU oil marketing companies could reduce banks’ trading margins, while stricter forex documentation requirements are expected to raise operating costs. |
The Reserve Bank of India’s measures to curb speculative currency positions and ease pressure on the rupee could weigh on banks’ forex and treasury income while putting pressure on net interest margins (NIMs). Private sector banks are likely to face a bigger impact because forex fees account for a larger share of their profits and their treasury operations rely more heavily on derivatives and trading.
Forex fees accounted for an average 9 per cent of profit before tax (PBT) for private banks covered by the brokerage in FY26, compared with 5 per cent for public sector banks. Treasury income contributed 16 per cent of PBT for PSU banks against 4 per cent for private lenders, but public sector banks rely less on proprietary trading and derivative structuring. These differences could leave private banks more exposed to the RBI‘s curbs, according to JM Financial.
The RBI’s measures include restrictions on rebooking cancelled rupee forex derivative contracts, a reduction in the threshold for undertaking certain derivative transactions without establishing an underlying exposure, a new foreign exchange risk reserve requirement and tighter daily cash reserve ratio (CRR) maintenance. The central bank has also opened a special dollar-selling window for three public sector oil marketing companies (OMCs), shifting their dollar demand away from the interbank spot market.
The new rules
Under the revised rules, authorised dealers cannot permit users to rebook rupee-linked foreign exchange derivative contracts cancelled after the directions were issued, although rollovers at maturity remain permitted. Lower transaction volumes could weigh on banks’ forex and treasury income.
The RBI has reduced the threshold for undertaking forex derivative transactions without establishing an underlying exposure from $100 million to $5 million equivalent outstanding across banks. The revised limit also applies to exchange-traded rupee currency derivatives across all exchanges combined. The restrictions could reduce transaction volumes and associated forex income, with smaller businesses expected to be more adversely affected.
The central bank’s special dollar-selling window for Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation took effect on October 12. The RBI will meet their entire daily dollar requirement through designated banks until further notice. Since OMCs are among the largest sources of dollar demand in the domestic market, the arrangement shifts these transactions away from the interbank spot market and onto the RBI’s own books.
The move could reduce banks’ trading margins on OMC-related dollar flows, although designated banks may continue to earn transaction fees for facilitating the sales.
The RBI has also introduced a foreign exchange risk reserve (FERR) requirement under which banks must maintain a non-interest-bearing cash reserve with the central bank equal to 20 per cent of the rupee equivalent of the notional value of eligible rupee-linked foreign exchange derivative contracts exceeding $2 million. The requirement is expected to weigh on NIMs by tying up funds that would otherwise be available for deployment.
Separately, the RBI has raised the minimum daily CRR maintenance requirement from 90 per cent to 99 per cent of the prescribed requirement from the fortnight beginning October 16. The average CRR requirement remains unchanged, so the measure does not constitute a conventional CRR hike. However, banks will have less flexibility to maintain lower reserve balances early in a fortnight and deploy funds in short-term, higher-yielding avenues. The measure is intended to make it more expensive to fund speculative dollar positions and is expected to weigh on NIMs.
The RBI has also tightened documentation requirements for customers hedging contracted foreign exchange exposures. Banks must obtain an undertaking confirming that the same exposure has not been hedged with another bank and disclose details where an exposure is split across lenders. The additional documentation requirements are expected to raise operating costs for banks.
The impact will vary across lenders depending on their forex fee income and treasury operations. While reduced derivative volumes and the shift of OMC dollar demand away from the interbank spot market could weigh on forex and trading income, the FERR requirement and tighter daily CRR maintenance are expected to put additional pressure on margins. Private sector banks are likely to be relatively more affected because of their greater dependence on forex fees and trading-related treasury income.
