RBI Eases Capital Controls, Removes Derivatives Ban on Offshore Rupee Trades

RBI Eases Restrictions on Forex Dealers in Offshore NDF Market

The Reserve Bank of India (RBI) has withdrawn some of the restrictions imposed on forex dealers taking positions in the offshore non-deliverable forwards market (NDF) in an effort to curb rupee volatility. This move comes just a few days after RBI Governor Sanjay Malhotra stated that the curbs would not remain in place indefinitely.

According to the RBI, authorised dealers will no longer be required to restrict offering non-deliverable derivative contracts involving the rupee to resident or non-resident users. Additionally, they can now permit a user to rebook any foreign exchange derivative contract involving the rupee. However, the RBI has clarified that authorised dealers will not be allowed to enter into rupee-denominated foreign exchange derivative contracts with related parties, with exemptions limited to the cancellation or rollover of existing contracts and back-to-back transactions conducted with non-related, non-resident users.

These measures have come into effect immediately, according to the RBI. Meanwhile, banks must continue to limit their net open positions in the onshore deliverable rupee market to $100 million at the end of each business day.

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The RBI's decision to ease restrictions on forex dealers comes after a series of stringent measures were introduced in late March to halt the rupee's free-fall towards new lows. As Brent crude surged past $100 a barrel on worsening US-Iran tensions, the central bank aimed to curb excessive volatility in the market. The measures led to the unwinding of nearly $40 billion of speculative trades in the offshore NDF market, resulting in the rupee rebounding from a record low of 95.21 against the dollar as of April 10.

In its bimonthly policy review, Malhotra stated that the measures were temporary and aimed at addressing specific market developments. The RBI remains committed to the internationalisation and deepening of broader markets.