Bank Nifty drops 4% after RBI's move to cap NOP in onshore market

RBI's cap on banks' net open forex positions sparks sharp sell-off in banking stocks amid concerns over MTM losses and forced unwinding of dollar-long trades

Shares of major banks declined sharply on Monday, with the Bank Nifty falling nearly 4 per cent, even as the broader market was down 2.14 per cent, following the Reserve Bank of India’s (RBI’s) surprise move to cap banks’ net open position (NOP) in the onshore forex market at $100 million, which could lead to mark-to-market (MTM) losses of ₹3,000 – 4,000 crore for banks in the fourth quarter, as outstanding positions are estimated to be large—around $30–40 billion.

 

The directive, issued on Friday with compliance by April 10, comes at a time when dollar-long bets had built up significantly.

 

Analysts say this move may have been driven by the sharp depreciation of the domestic currency against the US dollar and the wider spread between the offshore (NDF) and onshore markets. 

 

In times of low volatility, the 3-forward-month spread for the USD-INR contract in offshore and onshore markets is quite low in the range of 5-15 bps. However, whenever volatility rises the spread expands, and it reached 30-50 bps in 2025 and has now reached 75-90 bps (due to the West Asia conflict and the rise in oil and gas prices).

 

“We understand that the forex derivative market is dominated by larger banks – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank, and leading foreign banks operating in India – with gross onshore positions of $30-40 billion that offset each other”, Jeffries said in a note on Monday.

 

Union Bank of India and Canara Bank were the biggest losers in the Bank Nifty, with their shares falling 6.43 per cent and 5.37 per cent, respectively. IndusInd Bank declined 5.06 per cent, while IDFC First Bank and Bank of Baroda fell 4.88 per cent each. Yes Bank was down 4.80 per cent.

 

Among large banks, State Bank of India (SBI) declined 3.93 per cent; ICICI Bank fell 2.26 per cent; HDFC Bank was down 3.26 per cent; Kotak Mahindra Bank dropped 3.48 per cent; Axis Bank declined 3.64 per cent; and Federal Bank fell 3.68 per cent.

 

 “The normal trade is for banks to buy dollars in the onshore market (at a lower premium) and sell/ square-off in the offshore market (at a higher premium) to generate a spread and build depth in the market. However, if the banks are asked to unwind these positions to just $100 million, it could trigger a large volume of trade reversals and lead to INR appreciation versus the US dollar”, the note said, adding that this may have an impact on bank's profit in Q4FY26 as they may need to take MTM hit as of March 31, 2026.

 

Additionally, the report highlighted that every ₹1/USD dual movement in INR on $30-40bn of book can lead to a one-time loss of ₹3,000-4,000 crore for the banking sector. Appreciation of INR in the non-deliverable forward (NDF) market may lead to profits for hedge funds and foreign banks in the forex derivative markets.

 

Meanwhile banks have urged the RBI to reconsider its decision, warning that the move could result in significant MTM losses and compel an accelerated unwinding of trades. Lenders have proposed that the revised limit be applied only to incremental positions, a step that would safeguard existing exposures and ease near-term pressures on balance sheets. Market participants are also seeking a transition window. A three-month period to align positions with the new cap was seen as reasonable, while some expect a shorter extension until the end of the month.

 

“Our conversations with banks indicate that RBI is considering some leniency that may include grandfathering of existing contracts and applying limits on new contracts. It may also consider extending the time limit from 10-April to a further date, the smoother the forex movement and MTM impact on banks”, the Jeffries note said.