The Reserve Bank of India (RBI) on Monday partially rolled back some of the restrictions imposed on trades in the offshore non-deliverable forwards (NDF) market.
In a notification, the central bank said it has withdrawn its earlier circular that barred banks from offering certain derivative contracts to resident and non-resident users. Banks are now also permitted to rebook or cancel such contracts, with immediate effect.
Restrictions, however, remain in place for related-party transactions. Banks will not be allowed to offer derivative contracts to related parties, except for the cancellation or rollover of existing contracts.
‘Related parties’ clause amended’: Decoding RBI’s intent behind the move
“The intent appears to be a restoration of normal hedging activity without reopening the door to excessive speculative positioning. Accordingly, the ‘related parties’ clause has also been amended,” said Kunal Sodhani, treasury head at Shinhan Bank. He added that the rollback hints at the RBI’s comfort in allowing genuine risk management flows to resume, particularly from importers and exporters.
Despite the easing, the $100-million cap on open positions remains, reflecting the apex bank’s calibrated approach to preventing a buildup of speculative positions.
A treasury official at a private sector bank said that the relaxation was driven by practical challenges. “There are many situations where a forward contract is booked, but the settlement date shifts due to delayed shipments or payments. The earlier restrictions constrained genuine hedging activity as well,” the official said.
Timeline of RBI’s recent decisions on forex trade
On March 27, the RBI had directed banks to cap net open rupee positions in the onshore deliverable forex market at $100 million daily by April 10. In a subsequent circular on April 1, it extended these curbs and barred lenders from offering certain offshore forex derivative contracts to both resident and non-resident clients.
Following these measures, the rupee strengthened to as much as 92.58 against the dollar from its record low of 95.12. It ended at 93.12 on Monday.
Speaking at the April 8 post-monetary policy press conference, RBI Governor Sanjay Malhotra explained that the measures were aimed at addressing the buildup of arbitrage positions between the NDF and deliverable markets. He noted that excessive positioning increases volatility and may hinder efficient price discovery.
“Such measures are taken in response to specific market movements,” he said, adding that they are temporary in nature. The RBI remains committed to the long-term goal of rupee internationalisation.
Market participants expect the rupee to remain range-bound in the near term, supported by the forex curbs and a special window for oil importers, which has helped contain volatility.
“The rupee is likely to maintain a depreciating bias. Oil companies have been directed to purchase dollars through a special window, which should help keep the currency within a range,” said Anil Kumar Bhansali, treasury head at Finrex Treasury Advisors LLP. “We expect it to trade between 92.50 and 93.50 in the near term, with a slight downward bias.”