Rupee volatility creates selective opportunities for banks’ forex income in Q3
Sharp swings in the Indian rupee during the third quarter (Q3) have created a more active operating environment for bank treasuries, offering some support to foreign exchange (forex) income. However, banking executives and treasury heads caution that the benefits are likely to be selective rather than broad-based across the sector.
The rupee depreciated 1.21 percent during the December quarter and briefly slipped past the psychologically important 91-per-dollar mark as trade-related uncertainties and tariff pressures weighed on the currency. While this volatility has increased trading and hedging activity, structural changes in the forex market mean that gains for banks are expected to remain measured.
Active USD/INR movements boost hedging volumes and transaction flows
Frequent two-way movements in the USD/INR pair encouraged corporates to step up hedging activity to manage currency risk. This led to higher transaction volumes in forwards and options, improving fee-based income opportunities for banks.
Treasury heads said that wider bid-ask spreads during volatile trading sessions, combined with increased customer participation, helped banks generate incremental income through exchange margins, commissions and treasury trading.
“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,” said Balasubramanian R, Head of Treasury at Dhanlaxmi Bank. “Overall, FX trading should provide solid support to other income.”
For banks, this additional forex income has acted as a cushion to non-interest income at a time when core lending margins remain under pressure.
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Regulatory and competitive pressures cap outsized forex gains
Despite the favourable trading environment, market participants emphasise that volatility alone does not guarantee a sharp rise in forex earnings. Increased regulatory oversight, improved transparency and the widespread adoption of digital forex platforms have intensified competition among banks.
These factors have compressed margins and reduced the scope for monetising volatile conditions through proprietary trading. As a result, forex income growth in Q3 is expected to be driven more by sustained customer flows and higher volumes than by large trading gains.
“Currency volatility on its own is unlikely to translate into a sharp rise in forex earnings across the banking system,” said V Ramachandra Reddy, DGM and Head of Treasury at Karur Vysya Bank. He added that improvement would remain modest and uneven across lenders, depending on their client mix and treasury capabilities.
Trump tariffs weigh on rupee, trigger RBI intervention
The rupee has remained under pressure since the US imposed a 50 percent duty on Indian goods in late August, triggering outflows from equity and debt markets. During this depreciation cycle, the currency slipped past 91 against the dollar, prompting the Reserve Bank of India to intervene in the spot market to curb excessive volatility.
In 2025, the rupee emerged as the worst-performing currency in Asia, depreciating 4.75 percent. The weakness has extended into 2026, with the currency down 0.10 percent so far, according to Bloomberg data. The pace of decline has also raised concerns, as the rupee took just 231 days to slide from 85 to 90, signalling stress in the forex market despite a relatively stable macroeconomic backdrop.
On January 7, the rupee was trading around 89.96 against the dollar in afternoon trade, supported by a weaker dollar index and falling crude oil prices.
What this means for banks’ Q3 earnings outlook
For banks, rupee volatility offers incremental upside to treasury and fee income, but it is unlikely to be a game-changer for overall profitability. Analysts expect Q3 forex income to:
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Provide support to non-interest income
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Benefit banks with strong corporate hedging franchises
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Remain uneven across public and private sector lenders
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Be limited by regulatory and margin constraints
Banks with a diversified client base and efficient digital forex platforms are better positioned to capitalise on higher transaction volumes, while smaller lenders may see only marginal gains.
Impact on the market and banking stocks in the near term
From a market perspective, expectations of stable forex income may help ease concerns around banks’ earnings during a challenging quarter. However, investors are unlikely to re-rate banking stocks solely on treasury gains, as core factors such as credit growth, asset quality and net interest margins continue to dominate valuation narratives.
In the near term, banking stocks may see selective support, particularly for lenders that demonstrate resilience in non-interest income streams. Broader sector sentiment, however, will remain sensitive to currency movements, global trade developments and RBI policy signals.
What traders and investors should watch going ahead
For traders, heightened USD/INR volatility can translate into short-term opportunities in banking stocks around earnings announcements, especially for lenders with active treasury operations. However, such trades remain event-driven and sensitive to currency direction.
For long-term investors, the key takeaway is that forex income acts as a buffer rather than a growth engine. Portfolio strategies should continue to focus on banks with:
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Consistent credit growth
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Strong balance sheets
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Stable asset quality
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Diversified income streams
As one treasury executive summed it up, “FX volatility helps, but it cannot substitute for strong core banking performance.”
Overall, rupee volatility in Q3 is expected to lend measured support to banks’ forex income, cushioning earnings amid global uncertainty. Yet, with competition and regulation limiting windfall gains, the impact on the broader banking sector is likely to remain contained, keeping investor focus firmly on fundamentals in the coming quarters.
