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Informist, Thursday, Apr. 2, 2026

 

By Pratiksha

 

NEW DELHI – The Reserve Bank of India doubled down on its support for the rupee and issued fresh directions late Wednesday, prohibiting banks from offering non-deliverable derivative contracts using the rupee to resident or non-resident clients, effective immediately. With this, the central bank has practically drawn a line between the onshore foreign exchange market and the offshore non-deliverable forwards market, dealers said. 

 

In its latest directions, the central bank has intensified its crackdown on speculative activity in the currency market by targeting corporate arbitrage to boost the Indian unit. The central bank also said that companies cannot rebook cancelled forward contracts. 

 

These measures by the RBI come less than a week after it mandated that all authorised dealers trim their onshore net open positions to $100 million by Apr. 10, directly targeting the popular trade in which banks buy dollars onshore and sell the greenback in non-deliverable forward market to benefit from the spread.

 

The rupee has been under extreme downward pressure due to a surge in crude oil prices and strong foreign portfolio outflows following the US and Israel's attack on Iran on Feb. 28. The Indian currency depreciated by over 4% against the dollar last month.

 

Under the latest norms, onshore corporates can no longer effectively access the NDF market or benefit from onshore-offshore arbitrage, either directly or through banks, market participants said. Moreover, after Apr. 10, banks would be allowed to hold only a paltry $100 million in net open positions involving the rupee in the offshore market, thus making the Indian currency market's exposure to the offshore market nominal at best.  

 

"By closing this channel for non-banks to potentially engage directly in INR NDF markets, RBI is effectively increasing the bifurcation between onshore and offshore, with the objective to reduce the spill overs from INR NDF markets to onshore currency weakness," Michael Wan, senior currency analyst at MUFG Bank, said.

 

While there is no official data on how much foreign exchange trading involving the rupee is conducted in the offshore market, some market participants estimate it at as much as $100 billion per day on average. 

 

Market participants pointed out that price discovery onshore would become an issue following the clampdown on the popular market, as the RBI's recent move will substantially limit the transmission of stress from offshore markets to onshore. Moreover, in the medium term, there can be challenges like thin liquidity and wide bid-ask spreads, they added.

 

"After the RBI's latest rules, offshore market levels would become irrelevant to us and spot may actually become a bit distorted for some time," a senior treasury official at a state-owned bank said. "The market will need some time to find its footing."

 

The spread between the onshore and offshore markets has widened significantly following the RBI's directions. The spread for the one-month tenor widened by almost 100 paise on Thursday. Before the central bank's latest directions, both the onshore and offshore markets were broadly on par in terms of the rupee's exchange rate.

 

However, with the challenge of speculative bets reduced, the RBI's job of supporting the rupee becomes easier and more effective, dealers said.

 

The build-up of speculative positions in the offshore market dilutes the RBI's effort to support the rupee in the onshore market and depletes foreign exchange reserves that the central bank must use to prevent the rupee from going into a free fall. 

 

"…with speculation more or less out of the way, especially from the offshore NDF channel, the efficacy of the RBI's FX intervention via reserves will rise, giving the RBI greater hold over the exchange rate in these tumultuous times," Dhiraj Nim, foreign exchange strategist at ANZ Bank India, said.  

 

However, market participants said that the RBI's latest measures may do little to support the rupee at a time when the fundamental factors are not in its favour.

 

"In the near-term, this (RBI's directions) could alleviate pressure for the RBI to intervene to stabilise the INR," currency analysts at Commerzbank said in a note. "However, it is unlikely to stem the currency's decline in the medium-term as importer dollar demand is expected to remain firm amid elevated global commodity prices."

 

The absence of capital flows would also mean a fundamentally weaker rupee, market participants said. They added that despite the central bank's aggressive measures to bolster the rupee, the Indian currency risks falling to 96-97 per dollar in the near-term if the conflict in West Asia persists.  End

 

US$1 = INR 93.10

 

Edited by Deepshikha Bhardwaj

 

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