Indian Rupee Expected to Strengthen Amid RBI Measures Against Speculative Activity

Indian Rupee Poised for Strong Gains as Authorities Clamp Down on Speculation

The Indian rupee is expected to experience significant gains after the Reserve Bank of India (RBI) implemented stricter measures to curb speculation in the currency market. The RBI extended curbs to offshore derivatives just days after limiting banks' local positions, in an effort to shore up the rupee.

With cash trading suspended for a two-day break, dollar-rupee forwards have fallen by approximately 1.4% this week, indicating a shift in expectations towards a stronger Indian currency. The RBI stated that authorized dealers are no longer permitted to offer non-deliverable derivative contracts involving the rupee to resident or non-resident users. However, lenders can still offer deliverable FX contracts for hedging purposes, with users unable to offset those trades with positions taken offshore.

The RBI's move aims to eliminate some of the most popular methods for betting against the rupee, which have been contributing to its decline. Non-deliverable forwards and arbitrage trades have been used by traders to build short positions against the rupee. The central bank's earlier efforts to intervene directly in the market failed to arrest the rupee's slide to a record low.

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The new rules, which take effect immediately, follow the RBI's decision to cap lenders' daily onshore currency positions at $100 million. This directive resulted in banks scrambling to unwind approximately $30 billion of arbitrage trades, with an estimated $4 billion to $10 billion already unwound. The RBI also instructed banks not to allow clients to rebook any FX derivative contracts once they have been canceled, and to refrain from undertaking any FX derivative contracts with related parties.

The offshore NDF market, which is large and often sets the tone for rupee pricing, averaged daily trading of approximately $149 billion in 2025, according to the Bank for International Settlements. This is more than double the $72 billion traded onshore.

The RBI's latest measures signal an attempt to ensure the exchange rate is determined in the onshore market, where the central bank has better control, and to restrain speculative attacks. Much of the arbitrage trade still needs to be unwound before an April 10 deadline set by the authorities. If the rupee remains under pressure, the RBI has other tools at its disposal, including tighter capital controls or limits on foreign investors' ability to take money out of the country.

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