RBI's Outlook on Non-Operational Pledge-Indexed Non-Resident Rupee Remains Uncertain

RBI Eases Restrictions on Offshore NDF Market, but Remains Cautious on Rupee Volatility

The Reserve Bank of India's (RBI) partial easing of curbs in the offshore non-deliverable forwards (NDF) market is unlikely to change the central bank's stance on the net open position for the Indian rupee (NOP-INR), according to market participants. Geopolitical uncertainties, along with persistently elevated Brent crude prices, do not appear to be tapering down anytime soon.

On April 20, the RBI released a notification withdrawing some of the restrictions imposed on forex dealers taking positions in the offshore NDF market to curb rupee volatility. Authorized dealers can now offer non-deliverable derivative contracts involving the rupee to resident or non-resident users, and permit a user to rebook any foreign exchange derivative contract involving the rupee.

The RBI Governor had stated on April 8 that these measures were temporary, as the central bank had seen speculative positions being built in the arbitrage market in March, and had to clamp down on excessive volatility. Despite the easing of restrictions, the RBI has not eased the limit for the net open positions for the local currency. Market participants believe that this limit will continue until more clarity emerges on the Indian rupee's moves in the near-term.

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The RBI introduced the net open position limit on March 27 to curb currency volatility, which was considered unusual. The limit was imposed after the rupee breached the psychological level of Rs 95 per dollar on March 30, briefly touching an all-time low of Rs 95.21 per dollar. Following this, more restrictions were placed by the RBI, prohibiting authorized dealers from offering non-deliverable forwards contracts to residents and non-residents.

The geopolitical tensions between the US and Iran have shown no signs of abating in the near future. As a result, Brent crude prices may shoot up should there be any more escalation, despite currently trading at around $100 per barrel. The RBI is likely to remain cautious, preferring tighter control over speculative exposures until there is clearer stability in external conditions.

The rupee has recovered nearly 2 percent to now trade at near Rs 93 per dollar levels since the restrictions were placed. However, traders warn that there could be a slight catch, as more freedom for hedging may lead to an increase in dollar demand, especially from importers rushing to cover exposures. This adds another layer of pressure on the rupee.

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At 12:30 IST, the rupee was trading at Rs 93.41 to the dollar, as compared to the closing level of Rs 93.13 per dollar in the previous trading session.