India’s RBI bars banks from offering clients rupee non-deliverable forwards amid currency strain

The Reserve Bank of India on Wednesday barred authorized dealers from offering rupee non-deliverable forwards to resident and non-resident clients, further tightening foreign exchange rules as the South Asian currency faces persistent pressure.

The central bank said that while lenders could offer deliverable foreign exchange derivative contracts to users to meet their hedging requirements, they need to ensure the clients have not taken an offsetting position in the non-deliverable forwards (NDF) market.

The changes follow the regulator’s decision last week to impose a $100 million cap on authorised dealers’ net open positions on the rupee ‌in the foreign exchange market, applicable by April 10.

India’s FX curbs buy rupee some relief but strain bank profits

The recent measures from the central bank come at a time when the rupee has hit a string of record lows ‌as ⁠worries over the spillovers from the Iran war sent the currency down over 4% against the dollar.

The central bank’s decision to levy the position curbs will target the basis trade arbitrage for banks that grew as offshore markets started ​to price in quicker rupee declines, spurred by the Iran war, compared to onshore markets.

Following the notification of the amended rules on net open positions, some bankers pointed out that corporates had stepped into the FX market to take on similar arbitrage positions, which also contributed too stunting the rupee’s recovery on Monday.

Banks ask India’s RBI for 3 months to comply with FX position caps, sources say

The central bank has also said that authorised dealers shall not permit a user to rebook any foreign exchange derivative contract, whether deliverable or non-deliverable, which has been cancelled after April 1.

The central bank has also barred authorised dealers from entering into foreign exchange derivative contracts with their related parties.