RBI Bans Rupee NDFs, Tightens Forex Rules to Defend Rupee

RBI Intensifies Efforts to Stabilize Rupee

The Reserve Bank of India (RBI) has announced a new set of stringent measures governing foreign exchange derivatives involving the Indian rupee. In a circular issued late on Wednesday, April 1, 2026, the central bank barred authorised dealers from offering non-deliverable derivative contracts (NDFs) involving the rupee to both resident and non-resident users. The move, which is effective immediately, is a direct response to the escalating pressure on the currency and is aimed at curbing speculative activities that have pushed the rupee to successive all-time lows.

Background: The Initial Clampdown on Banks

This latest directive follows an earlier action taken by the RBI just last week. On Friday, March 27, the central bank imposed a hard cap of $100 million on the net open positions that authorised dealers could hold in the rupee. This rule, set to take effect on April 10, 2026, replaced a more flexible framework that allowed banks to maintain open positions up to 25% of their Tier-I capital. For larger banks, this meant a steep reduction from previous exposures that ran into billions of dollars. However, the initial measure failed to provide sustained relief, as banks reportedly offloaded their positions to corporate clients, who then exploited arbitrage opportunities between the onshore and offshore markets, renewing pressure on the rupee.

Unpacking the New Directives

The RBI's new instructions are designed to close these arbitrage loopholes. The key restrictions include:

1. Ban on Non-Deliverable Contracts: Authorised dealers are now prohibited from offering any non-deliverable derivative contracts involving the Indian rupee.
2. Hedging Conditions: While deliverable forex derivative contracts are still permitted for genuine hedging purposes, they come with a critical condition: users must not hold any offsetting non-deliverable positions.
3. No Rebooking of Cancelled Contracts: The central bank has barred the rebooking of any foreign exchange derivative contract involving the rupee that has been cancelled after the issuance of the circular. This practice allowed corporates to book profits on favourable exchange rate movements and then re-enter new contracts for the same underlying exposure, effectively facilitating speculation.
4. Restrictions on Related Parties: Authorised dealers are also forbidden from undertaking any INR derivative transactions with their related parties, as defined by established accounting standards like Ind AS 24.

Market Context and Rupee's Performance

These measures come at a critical time for the Indian currency. The rupee has been under severe strain, breaching the psychological 95 per US dollar mark in intra-day trade earlier this week. In March alone, the currency depreciated by 4.24%, its worst monthly performance in six years, driven by concerns over geopolitical tensions and their impact on oil prices. The RBI's actions signal its growing discomfort with the currency's volatility and its determination to regain control over the forex market.

Summary of RBI's Forex Market Regulations

Impact on Banks and the Broader Market

The immediate impact of these directives is expected to be significant. Banks are now faced with the task of unwinding substantial currency positions, estimated to be between $10 billion and $10 billion, by the April 10 deadline for the open position cap. This forced unwinding is likely to trigger considerable mark-to-market (MTM) losses. Analysts at Jefferies have estimated that a one-rupee drop against the dollar could result in one-time losses of ₹30,000 to ₹40,000 crore for the banking sector. The new rules also make hedging more difficult and costly for both banks and large corporations.

Analysis of the RBI's Strategy

The central bank's strategy appears to have shifted from direct market intervention, such as selling dollars from its reserves, to controlling market structure and positioning. By targeting the arbitrage between onshore and NDF markets, the RBI aims to reduce speculative flows that amplify currency weakness. According to Dhiraj Nim, an FX strategist at ANZ Bank, these measures are designed to "cut speculation" and make the RBI's objective of curbing excess volatility easier. However, he noted that they do not reverse the fundamental pressures on the rupee, such as high oil prices and weak capital flows.

Outlook and Conclusion

The forex market is bracing for a period of heightened volatility as participants adjust to the new regulatory landscape. The forced unwinding of large positions could lead to sharp, unpredictable swings in the rupee's value in the short term. While the RBI's clampdown is a clear signal of its intent to defend the currency, the effectiveness of these measures will depend on how banks manage the transition and how global economic pressures evolve. The coming weeks will be crucial in determining whether these decisive actions can bring stability back to the Indian rupee.