The Indian rupee witnessed sharp volatility on Monday, hitting a fresh all-time low against the U.S. dollar, amid concerns that escalating tensions in West Asia and surging crude oil prices could further strain the country’s import bill.

At the interbank foreign exchange market, the rupee opened at 93.62 and strengthened to 93.57 against the U.S. dollar in early trade, marking a gain of 128 paise from its previous close after the Reserve Bank of India (RBI) tightened norms on banks’ net open positions (NOP) in the foreign exchange market, capping them at $100 million.

However, the gains proved short-lived, with the currency failing to sustain momentum and plunging to an all-time intraday low of 95.22, down around 160 paise from the day’s high.

On Friday, the rupee had already weakened sharply, falling 89 paise to close at a record low of 94.85 against the U.S. dollar. In March alone, the currency has declined more than 4%, marking one of its worst monthly performances in over seven years.

RBI’s NOP move fails to lift sentiment

The RBI’s latest directive, aimed at curbing excessive speculation in the currency market by limiting banks’ net open positions, failed to provide sustained support to the rupee. The initial relief was fleeting, as the currency continued to face pressure from elevated crude oil prices and persistent geopolitical tensions.

The move also signals a shift away from direct dollar sales, particularly as the central bank’s forward book has reportedly expanded significantly, potentially exposing it to mark-to-market losses.

By imposing a cap of $100 million, effective April 10, the RBI has effectively restricted banks from taking large proprietary positions that could amplify volatility in the rupee. Earlier, such limits were determined by banks’ boards as a proportion of their Tier-I capital.

According to analysts, the rupee’s muted response to the RBI’s action underscores the persistence of underlying pressures. Adverse terms of trade, elevated crude prices, and sustained foreign portfolio investor (FPI) outflows are likely to keep the currency under stress.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments, said, “Unwinding of large dollar positions is contributing to rupee appreciation. However, while the RBI directive will curb excessive speculation in the futures market, it is not sufficient to prevent weakness in the currency, which is driven by a widening trade deficit and current account deficit due to elevated crude prices and sustained FPI outflows.”

Impact on banks and markets

The new norms could weigh on banks’ treasury and fee income from currency trading, while also increasing hedging costs and widening spreads in the forex market.

The RBI directive, issued late Friday, requires lenders to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day. While aimed at strengthening systemic stability, the move has raised concerns about its near-term impact on banks’ trading flexibility and profitability.

Market participants see the measure as a constraint on banks’ ability to take large proprietary positions in forex markets, an important contributor to non-interest income.

Weighed down by the RBI’s move, the Nifty Bank index plunged nearly 4%, emerging as the top sectoral laggard. All 14 constituents traded in negative territory, led by heavyweights such as HDFC Bank, ICICI Bank, State Bank of India, and Axis Bank.

Shares of HDFC Bank declined 2.8%, while ICICI Bank fell 1.8%. Axis Bank dropped 3.05%, and State Bank of India slipped 3.8%.

The sell-off was sharper in mid-tier and public sector banks, with IndusInd Bank, Union Bank of India, and Canara Bank falling 5-7% each. Bank of Baroda also declined nearly 5%, reflecting broad-based risk aversion across the sector.

Meanwhile, the BSE Sensex and NSE Nifty ended lower by 2% each amid broad-based selling across indices.

The RBI’s move comes at a time when banking stocks are already under pressure. The Nifty Bank index has fallen over 16% in the past month, weighed down by global risk-off sentiment, sustained FII outflows, and concerns over stretched valuations following a prolonged rally.