The Reserve Bank of India (RBI) has decided to partially lift the restrictions imposed earlier this month on certain rupee derivative trades. These restrictions were introduced on April 1 to address the heightened volatility in the rupee, which had dropped to record lows beyond the 95 mark in late March. The central bank’s measures included prohibiting banks from offering non-deliverable forwards (NDFs) to clients and limiting the rebooking of canceled forward contracts to reduce pressure on the currency.
In its latest move, the RBI has completely removed these restrictions. Additionally, rules concerning foreign exchange derivative contracts with related parties have been relaxed. This includes allowing the cancellation and rollover of existing contracts and enabling transactions with non-resident entities on a back-to-back basis. The RBI’s actions signify a gradual rollback of crisis-related controls while maintaining vigilance over speculative activities.
Despite the rollback, the cap on banks’ net open rupee positions in the onshore market at $100 million remains unchanged. The earlier restrictions aimed to address arbitrage-driven volatility by restricting banks’ positions. However, these measures were not as effective as anticipated, with banks reportedly transferring positions to corporates and related entities, thereby diluting the intended impact.
Market observers view the recent easing of restrictions as the RBI’s effort to strike a balance between restoring normal hedging activities and preventing excessive speculative trades that could disrupt the currency’s stability. This decision comes in the wake of increased scrutiny of corporate and related-party transactions amid concerns that certain deals were circumventing regulatory safeguards.
