The Reserve Bank of India (RBI) has partially rolled back restrictions on certain rupee derivative trades, aiming to normalize market activity after implementing emergency measures to stabilize the currency. Initially introduced on April 1 to address increased rupee volatility, the restrictions included bans on non-deliverable forwards (NDFs) and rebooking of canceled forward contracts to curb arbitrage trades pressuring the currency. The recent RBI announcement withdraws these restrictions entirely and relaxes rules on foreign exchange derivative contracts involving related parties.
The latest move by the RBI signifies a gradual removal of crisis-era controls while maintaining vigilance over speculative activities. Notably, the cap on banks’ net open rupee positions in the onshore market remains at $100 million. The earlier restrictions aimed to reduce arbitrage-driven volatility by limiting banks’ positions, but their effectiveness was diminished as banks shifted positions to corporates and related entities, deviating from the intended impact.
In response to a review, the RBI decided to rescind the instructions issued on April 1, emphasizing that authorized dealers can only engage in specific foreign exchange derivative contracts with related parties. These include canceling and rolling over existing contracts and conducting transactions with non-related non-resident users on a back-to-back basis. Following a second set of restrictions introduced in April, the rupee saw a recovery of nearly 2%, stabilizing within the range of 92.50 to 93.50 in recent trading sessions.
Market observers interpret this rollback as the RBI’s effort to balance restoring normal hedging activities and preventing excessive speculative trades that could disrupt the currency. The central bank’s action also reflects heightened scrutiny of corporate and related-party transactions amid concerns that some deals were circumventing regulatory safeguards.
