The Reserve Bank of India (RBI) has tightened rules on rupee non-deliverable forward (NDF) trading. 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.
The RBI said the change aims to reduce speculative activity and limit arbitrage between onshore and NDF markets. It follows an earlier step to curb banks’ daily net open positions in the onshore deliverable rupee market, effective 10 April.
The latest restriction may widen the gap between onshore and offshore pricing. A strong opening for the rupee was expected when trading resumed on Thursday in a holiday-shortened week.
Attention is also on geopolitical developments, with oil prices reported to have jumped after a US speech. The rupee may face pressure from the risk of a third consecutive year of a balance of payments deficit.
The article was produced using an artificial intelligence tool and reviewed by an editor.
With the Reserve Bank of India disallowing banks from offering non-deliverable forward contracts, the arbitrage window we used between onshore and offshore markets is now closed. This is already causing the spread between the two markets to widen, with the one-month forward gap hitting over 15 paise. We must now adapt to a more segmented currency market.
Given these new restrictions, we should prepare for higher volatility in the onshore deliverable market as it becomes the sole venue for many participants. Derivative traders should consider strategies that profit from price swings, such as buying rupee call and put options. This allows us to position for significant movement without betting on a specific direction.
For any required hedging or directional trades, our focus must now shift exclusively to deliverable forward and futures contracts. Liquidity will likely concentrate in these onshore instruments, making them the most reliable tools for price discovery in the coming weeks. We should be cautious about offshore quotes as they may become less representative.
External pressures are also building against the rupee, particularly from rising oil prices. As geopolitical tensions have pushed Brent crude back over $95 a barrel, our import costs are increasing. Looking back, we saw how similar oil price spikes in late 2025 put significant pressure on the rupee, and we expect that pattern to repeat.
This situation fuels concerns about our balance of payments, which is now at risk of posting its first quarterly deficit in two years. After eight straight quarters of surplus, preliminary data for the January-March 2026 quarter points to a potential $5 billion deficit. This underlying economic shift suggests a weaker bias for the rupee going forward.
