The Reserve Bank of India (RBI) has revised its foreign exchange regulations in response to persistent Middle East tensions and elevated energy prices, which have contributed to the weakening of the Indian Rupee (INR) and volatility in local markets [1]. Effective April 10, the RBI imposed a mandatory daily limit of $100 million on Authorised Dealers’ Net Open Position (NOP-INR) in the local deliverable market, replacing the previous cap of 25% of Tier 1 capital. This measure is intended to curb excessive positioning in the currency market and complement the RBI's FX intervention efforts [1].
Following the announcement, the INR experienced a sharp rally to the upper-93 levels against the US dollar, driven by expectations that arbitrage flows would weaken under the new directive and that offshore–onshore curves would diverge. However, these gains were short-lived, as the rupee subsequently weakened to a new low below 95/USD, reflecting ongoing risks from high energy prices to external balances and financial market stability [1].
The local bond market also reacted to the developments, with the benchmark 10-year bond yield rising to 7% for the first time since mid-2024. This increase was attributed to concerns over the impending fiscal burden, steady supply of state issuances, and elevated global yields. Additionally, overnight index swap (OIS) rates rose sharply as investors priced in the risk of a tighter policy stance [1].
Looking ahead to FY27, despite the denominator effect from nominal GDP growth (higher inflation), prevailing fiscal costs and the likelihood of higher allocations towards fertilizer subsidies pose small upside risks to the full-year deficit projection, according to DBS Group Research economist Radhika Rao [1].
CONCLUSION
The RBI's new FX limits represent a decisive intervention to stabilize the rupee, but market reactions indicate persistent concerns over fiscal and external risks. Despite a brief rally, the INR reached a new low, and bond yields and swap rates rose, signaling heightened investor caution. Fiscal pressures and subsidy allocations may continue to weigh on deficit projections in the coming years.