The Reserve Bank of India (RBI) has restricted access to rupee non-deliverable forward (NDF) contracts. Banks are now barred from offering rupee NDF contracts to resident and offshore users.
Authorised dealers can still provide deliverable foreign exchange derivative contracts for hedging. This is allowed only if the user does not take offsetting non-deliverable derivative positions.
Rbi Tightens Ndf Access
The RBI said the move aims to reduce speculative activity and close an arbitrage opportunity between onshore and NDF markets. This followed an earlier directive that led banks to unwind positions and increased corporate activity in response.
The earlier measure limited banks’ daily net open positions in the onshore deliverable rupee market, effective 10 April. The latest action is expected to widen the gap between onshore and offshore pricing.
The rupee may also face pressure from geopolitical developments, with oil prices jumping after a US speech. There is also a risk of a third consecutive year of a balance of payments deficit.
We saw the Reserve Bank of India move decisively against non-deliverable forwards (NDFs) last year to curb speculation. This action, which disallowed banks from offering rupee NDFs, was intended to shield the currency. The move effectively pushed speculative activity further offshore and created the predicted gap with onshore pricing.
Market Impact And Trading Focus
Those concerns about a third straight balance of payments deficit proved correct, with India posting a deficit of over $20 billion for the fiscal year that ended in March 2025. However, recent data for the last quarter showed a modest surplus, signaling a potential, fragile turnaround. This shift suggests underlying fundamentals may be improving slightly, even if sentiment remains cautious.
Right now, the rupee is trading with a nervous tone around 84.50 against the dollar, especially with Brent crude prices climbing back towards $90 a barrel due to new geopolitical tensions. This backdrop means any negative global news could quickly pressure the currency. We remember how oil spikes consistently weakened the rupee throughout last year.
Traders should therefore focus on onshore, deliverable contracts for any hedging, as the NDF market remains disconnected and less reliable for genuine price discovery. Given the RBI’s demonstrated preference for stability, we expect it to intervene and sell dollars if the rupee weakens significantly past the 85.00 mark. Options strategies that bet on a range-bound currency could be attractive in the coming weeks.
The persistent gap between onshore and offshore rates, which often widened to over 15 paise last year, is a clear indicator of offshore sentiment. While direct arbitrage is restricted, this spread can be used as a gauge for underlying pressure. Traders can use onshore volatility instruments to position for an expected convergence or divergence of these two rates.
