Why Bank Nifty Plummeted Over 4% After RBI's This Forex Curb

The sectoral bourse Bank Nifty plummeted over 4% in Monday's trading session after India's central bank RBI capped rupee's foreign exchange exposure at $100 million by the end of each day.

This Reserve Bank of India directive was issued last week, requiring compliance by April 10.

All 14 constituents of the Bank Nifty index were trading in the red. Bank Nifty, which had rallied over 4% in the last two trading sessions, recorded a reversal in fortunes after hitting dragging by 2.92% to hit an intra-day low of 50,744.60 level.

Among bankings stocks, AU Small Finance Bank was the top loser, declining 4.7% to Rs 841.50 apiece on the National Stock Exchange (NSE). IndusInd Bank and Union Bank of India declined 4.06% and 4.15%, respectively.

Also Read: INR vs USD: Rupee Hits Record-Low, Touches 95 Mark Against US Dollar

Meanwhile, banking major HDFC bank shares hit a fresh low in the trading session at Rs 738.30 apiece, while the public lender State Bank of India (SBI) shares declined over 3%.

RBI Directive On Open Rupee Positions: Key Details

The Reserve Bank of India (RBI) last week directed banks to limit net open exposure to the currency in the foreign exchange market to $100 million by the end of each day.

While RBI's cap on onshore ​position limits are expected to lead to dollar selling by banks in ​the domestic foreign exchange market, the relief could be temporary as the directive has made banks wary of possible losses.

Meanwhile, the spread of arbitrage trade, which were built were built by purchasing dollars onshore and selling them in ​the NDF market, has increased. This comes amid a pickup in volatility and the fall in rupee on heightened risk aversion and oil-driven pressures linked to the US-Iran war.  The size of such positions is estimated at $25 billion ​to over $50 billion.

On the other hand, Bank Nifty closed 4% lower at 50,275.35 level.