The Reserve Bank of India has tightened control over the foreign exchange market by barring banks from non-deliverable derivative contracts in the rupee. The move is aimed at curbing offshore speculation, improving transparency, and strengthening the onshore rupee market. It also comes amid pressure on the currency from higher oil prices, capital outflows, and geopolitical tensions.
What Are Non-Deliverable Derivatives?
Non-deliverable derivatives, or NDDs, are contracts usually traded outside India in financial centres such as Singapore, Hong Kong, London, and Dubai. They allow market participants to take positions on the rupee’s future movement without actual delivery of the currency. Settlement takes place in cash, generally in US dollars, based on the difference between the agreed rate and the market rate.
Why the RBI Acted
NDDs have often been criticised for weakening price discovery in the rupee market. Offshore trading can diverge from domestic fundamentals and influence expectations before Indian markets open. The RBI’s restriction is intended to reduce such distortions and limit speculative bets that can amplify volatility in the currency.
Misuse And Regulatory Concerns
The NDD market has also been misused by some participants through repeated cancellation and re-entry of contracts to benefit from favourable price movements. Large offshore players have sometimes built sizeable positions against the rupee during periods of stress, adding pressure to the currency in the domestic market. The RBI’s action closes a loophole that allowed regulatory arbitrage and opaque risk-taking.
Impact On Rupee And Market Stability
The rupee recovered sharply after the directive, reflecting improved sentiment. In the near term, reduced speculative activity may lower volatility and support more orderly currency movement. The move also reinforces the primacy of the Indian onshore market and aligns forex practices more closely with transparency and global accounting standards.
Last Modified: April 28, 2026