Rupee volatility in Q3 expected to offer some support to banks’ forex income

Forex income

• Rupee volatility in Q3 increased bank forex income from higher customer flows.
• Banks saw higher hedging and trading volumes, but gains were selective.
• Rupee fell 1.21 percent in Q3FY26, hitting 89.9675/USD amid ongoing depreciation

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Sharp volatility in the rupee during the third quarter has created a more active operating environment for bank treasuries, offering some support to forex income, though gains are expected to be selective rather than broad-based, bank treasury heads have said.

Frequent two-way movements in the USD/INR currency pair encouraged corporates to increase hedging to manage currency risk, leading to higher transaction volumes in forwards and options. This pickup in customer activity, along with wider bid-ask spreads during volatile trading sessions, helped banks generate incremental income through exchange margins, commissions and treasury trading, providing a cushion to overall non-interest income in Q3.

“FX income is expected to improve in Q3. Elevated two-way volatility in USD/INR boosted merchant hedging volumes, widened spreads and created trading opportunities. Overall, FX trading should provide solid support to other income,” said Balasubramanian R, who is head of treasury at Dhanlaxmi Bank.

Market participants, however, caution that currency volatility on its own is unlikely to translate into a sharp rise in forex earnings across the banking system.

Increased regulatory oversight, improved transparency and the widespread use of digital forex platforms have intensified competition and compressed margins, limiting the ability of banks to fully monetise volatile market conditions, they said.

As a result, forex income growth during the quarter is expected to be driven more by sustained customer flows and higher volumes rather than outsized proprietary trading gains, keeping overall improvement modest and uneven across banks, said V Ramachandra Reddy, DGM-head treasury, Karur Vysya Bank.

Trump tariffs hammer rupee

The rupee has been under pressure since the US imposed a 50 percent duty on Indian goods in late August, leading to outflow of funds from equities and debt. In the depreciation cycle, the rupee even crossed the psychological mark of 91 against the dollar, which prompted the Reserve Bank of India (RBI) to intervene in the spot market to curb volatility.

The rupee remained the worst performing currency in Asia, depreciating 4.75 percent in 2025. The fall has continued in 2026, so far, with the rupee down 0.10 percent, Bloomberg data shows. In Q3, the local currency depreciated 1.21 percent against the US dollar.

The currency took just 231 days to fall from 85 to 90, signalling growing stress in the foreign exchange market even as the broader macroeconomic backdrop remains comparatively stable.

On January 7, the rupee was trading at 89.96 in the afternoon trade amid weaker dollar and falling crude prices.