Banks push RBI to ease rupee defence rules, seek clarity on deposits

Indian banks have formally approached the Reserve Bank of India through industry bodies, pressing for a review of rupee defence measures introduced to manage currency volatility. The lenders are primarily seeking removal or modification of a regulation requiring them to maintain a 20% cash deposit with the RBI when using foreign exchange derivatives to hedge exposures related to current-account transactions.

The measure, aimed at stabilising the rupee during periods of external pressure, has emerged as a source of friction between the banking sector and regulators. Banks argue that the cash deposit requirement increases operational costs and constrains their ability to provide efficient hedging solutions to corporate clients engaged in international trade.

The banking industry has flagged concerns that the mandate could reduce liquidity in the forex derivatives market and make it more expensive for Indian businesses to protect themselves against currency fluctuations. Lenders have requested that the RBI either eliminate the requirement entirely or provide clearer guidelines on how long the measures will remain in place.

The RBI has implemented various measures in recent months to defend the rupee against depreciation pressures stemming from capital outflows and external headwinds. Officials have indicated that such measures are temporary responses to market conditions, though the central bank has not provided a specific timeline for their withdrawal. The outcome of discussions between the banking sector and the RBI could significantly affect forex market operations and corporate hedging practices across India.