Indian Banks Restrict NDF Contracts for Clients Amid Ongoing RBI Regulatory Flexibility: Report

Reserve Bank of India's Relaxation on Non-Deliverable Forwards Fails to Boost Client Activity

The Reserve Bank of India (RBI) lifted restrictions on non-deliverable forwards (NDF) imposed on April 1, when the rupee slid to an all-time low. The relaxation, aimed at facilitating companies with genuine hedging needs, has yet to translate into increased client activity. Despite the central bank's efforts to encourage NDF trades, three treasury officials from major banks stated that their institutions are still not allowing clients to undertake NDF trades.

According to the officials, the banks are cautious due to the high compliance and supervisory risks associated with NDF trades. The RBI had imposed restrictions on NDF trades after corporates began exploiting arbitrage opportunities between onshore and offshore markets. The central bank had capped banks' net open positions at $100 million to curb arbitrage trades, but corporates engaging in similar trades diluted the impact of the RBI's initial measures, prompting a deeper clampdown.

The RBI's scrutiny of how large banks unwound their rupee arbitrage positions, particularly in cases where corporates and related parties were involved, has made market participants extra cautious. RBI Deputy Governor T. Rabi Sankar's remarks at an FX conference earlier this month, stating that the central bank was unhappy with banks transferring rupee arbitrage trades to corporate clients, have added to the caution.

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The spread between onshore and offshore rates has compressed, diminishing the incentive to pursue NDF trades. The treasury official at the bank allowing limited NDF trades noted that simultaneous buying and selling of dollars for the same maturity offshore and onshore would raise warning signs.

As a result, the RBI's relaxation on NDF trades has failed to boost client activity, with banks remaining cautious due to the high compliance and supervisory risks. The RBI did not immediately respond to a Reuters email seeking comment.