Indian Companies Uncovered to Hold $3.7 Billion in Non-Deliverable Forwards

Indian Companies Flood Non-Deliverable Forwards Market Amid Regulatory Curbs

The Reserve Bank of India's (RBI) imposition of restrictions on lenders' net onshore open FX positions on March 27 led to a significant surge in activity in the non-deliverable forwards (NDF) market, with Indian companies' activity reaching over $3.7 billion on March 30.

This figure represents a fourfold increase from the average, indicating a rush to capture arbitrage opportunities created by banks unwinding positions in response to the regulatory curbs. The RBI's restrictions prompted a rush to lower positions aimed at benefitting from gaps between onshore and non-deliverable forwards.

As banks sold dollars in the domestic market and simultaneously bought them in NDF to close the trades, the spread between the two widened, creating arbitrage opportunities that corporates exploited by buying dollars onshore and selling in NDF. Clearing house data bears out how this fueled a surge in NDF activity.

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The data from the Clearing Corp of India shows a significant jump in client trading volumes in the NDF market, reaching $3.7 billion on March 30.

Dollar selling dominated the market, with corporate dollar sales reaching $3.7 billion, while buying was a mere $11.92 million. The data indicates why the central bank's curbs on size of banks' onshore FX positions were not able to meaningfully lift the rupee.

On March 30, the currency initially ticked up but fell to an all-time low past 95 per U.S. dollar eventually due to onshore corporate dollar demand. Since then, India's central bank has intensified its regulatory crackdown and barred local lenders from offering clients NDF while disallowing companies from rebooking canceled forward contracts.

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The series of measures by the RBI, especially the curbs on corporate activity, has helped boost the rupee, with the currency trading around 93 per U.S. dollar.