MUMBAI: The Reserve Bank of India (RBI) on Wednesday tightened oversight of the foreign exchange market by prohibiting banks from offering rupee non-deliverable forward (NDF) contracts to resident and non-resident corporate clients, as it seeks to curb speculative activity and stabilise the currency amid ongoing volatility.
The move comes after the central bank capped banks’ daily net open positions in the onshore deliverable rupee market at $100 million on Friday, to be implemented by April 10, overriding earlier internal limits linked to banks’ capital. However, banks shifted those contracts to corporates, which led to the rupee breaching the 95/$ mark intraday on Monday. The central bank had to intervene to pull the unit back below 94/$.
“Authorised Dealers shall not offer non-deliverable derivative contracts involving INR to resident or non-resident users,” RBI said in a notification on Wednesday.
The ban on offering NDF contracts will force banks to sell dollars, resulting in appreciation of the Indian unit on Thursday, currency dealers said.
“Authorised Dealers may, however, continue to offer deliverable foreign exchange derivative contracts to users to meet their hedging requirements provided that the user does not undertake offsetting non-deliverable derivative positions. For this purpose, the Authorised Dealers may call for such information/documents from users as they deem necessary for complying with the requirements,” the notification said.
Furthermore, the central bank said lenders may continue to provide deliverable foreign exchange derivative contracts to meet hedging needs but must ensure that clients do not hold offsetting positions in the offshore NDF market. Authorised dealers have been asked to seek necessary declarations or documentation to verify compliance.
RBI also said that banks should not permit a user to rebook any foreign exchange derivative contract involving INR, whether deliverable or non-deliverable, which is cancelled after the date of issuance of these instructions. For this purpose, authorised dealers may call for such information/documents from users as they deem necessary for complying with the requirements.
Moreover, authorised dealers will not undertake any foreign exchange derivative contract involving the Indian unit with their related parties.
The RBI also said authorised dealers will not be allowed to permit rebooking of any foreign exchange derivative contract, deliverable or non-deliverable, that has been cancelled after April 1. It also barred authorised dealers from entering into such derivative contracts with related parties, as defined under applicable accounting standards.
These instructions will be applicable with immediate effect, until further review, RBI said.
The latest measures follow a sharp depreciation in the rupee, which has fallen over 4 per cent against the dollar in March, pressured by concerns over spillovers from the Iran conflict. The Indian unit has been the worst-performing Asian currency in FY26, falling close to 10 per cent — its worst year since 2011–12.
“The restriction on cancellation and rebooking of FX derivative contracts closes a long-standing loophole that allowed market participants to roll over or reprice positions under the guise of hedging, but in reality, often facilitated speculative positioning,” said Kunal Sodhani, head of treasury, Shinhan Bank.
“Overall, the RBI’s message is unambiguous: the FX market is to function as a hedging mechanism aligned with real economic activity, not as a platform for leveraged speculation,” he added.
Market participants said the curbs aim to limit arbitrage opportunities in basis trades, which widened as offshore markets began pricing in steeper rupee depreciation relative to onshore markets amid geopolitical tensions.
Bankers had earlier flagged that corporates were increasingly taking similar arbitrage positions in the foreign exchange market, which may have also weighed on the rupee’s recovery earlier this week.
Source: Business Standard
