India's Offshore Non-Deliverable Forward Market Faces Reality Check Following RBI Crackdown on Speculative Trading Activity

India's Central Bank Cracks Down on Offshore Currency Speculation

The Reserve Bank of India (RBI) has taken unprecedented measures to curb excessive speculation in the country's multi-billion dollar offshore non-deliverable forwards (NDF) markets. The move is designed to prop up the fast-depreciating Indian rupee, which has been under pressure since the war in West Asia erupted in late February.

The RBI's measures, which are the strictest in over a decade, aim to limit the activities of arbitrageurs who have been taking advantage of the price differential between the onshore and offshore markets. The rupee was already on a depreciating bias, but the pressure on the currency intensified after the war in West Asia erupted.

According to estimates, the monthly turnover of the Indian NDF market could amount to between $5 billion and $8 billion, making the rupee one of the largest NDF currencies globally. The woes of the rupee have been mounting, with FY26 being termed as one of the worst fiscal years for the Indian rupee in more than a decade due to a combination of factors, such as the spike in Brent crude prices and persistent outflows from foreign investors.

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The RBI's first move was on March 27, when it announced that it would limit banks' net open position on the Indian currency (NOP-INR) in the onshore deliverable market to $100 million at the end of each business day. This was an unusual move by the central bank to curb excessive speculation. Banks have until April 10 to comply with this directive.

To put things simply, the RBI had asked banks to unwind their excessive long dollar positions in the offshore forwards market, and buy these dollars on the onshore spot market. The RBI's hard cap of $100 million could force banks to sharply reduce speculative or arbitrage-driven currency exposure.

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The RBI's measures are expected to dampen speculative activity and stabilise price swings in the INR. However, traders expect that liquidity in the offshore market will start drying up due to these measures, resulting in a wider spread between the onshore and offshore markets.

The rupee has seen its best intra-day gain of nearly 2% to trade as high as Rs 92.84 per dollar after opening at a sharp 130 paise gap. With the monetary policy committee (MPC) meeting next week, it will be interesting to see the commentary of the RBI on the rupee's trajectory.