Indian Firms' Non-Deliverable Forward Surge Hits $7 Billion as Companies Capitalize on Rupee Arbitrage Opportunities

Indian Companies Surge Activity in Non-Deliverable Forwards Market

The Reserve Bank of India's (RBI) imposition of restrictions on lenders' net onshore open foreign exchange (FX) positions has triggered a rush to capture arbitrage opportunities in the non-deliverable forwards (NDF) market. According to clearing house data, Indian companies' activity in the NDF market surged to over $7 billion on March 30, around seven times the average. This surge is a result of banks selling dollars in the domestic market and simultaneously buying them in NDF to close the trades, widening the spread between the two and creating arbitrage opportunities that corporates exploited.

Client trading volumes in the NDF market jumped manifold to $7.54 billion on March 30, as seen in the Clearing Corp of India data. Dollar selling dominated, with $7.51 billion of corporate dollar sales, while buying was a mere $24 million.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The data indicates why the central bank's curbs on the size of banks' onshore FX positions, announced on March 27, 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. The series of measures by RBI, especially the curbs on corporate activity, has helped boost the rupee with the currency trading around 93 per U.S. dollar.