The Reserve Bank of India (RBI) has withdrawn several curbs imposed on April 1 regarding rupee derivatives trade with immediate effect, though it has opted to retain the $100-million cap on banks’ net open positions in the onshore market. The RBI’s decision to pivot comes even as the rupee faced sustained pressure throughout last week.
The regulatory saga began when the rupee approached the 95-level. On March 27, the RBI capped banks' net open positions in the onshore derivatives market at $100 million to stem volatility. When that measure failed to halt the currency's slide, the regulator tightened its grip on April 1 by banning arbitrage trades, prohibiting banks from offering non-deliverable forwards to corporate clients, and barring the rebooking of cancelled forward contracts. Banks were also restricted from entering into rupee-linked forex derivative contracts with related parties.
In a new directive issued Monday titled ‘Risk Management and Inter-bank Dealings,’ the RBI announced that a review had led to the withdrawal of the April 1 instructions. This effectively reopens the door for banks to offer non-deliverable forwards and allows for the rebooking of cancelled contracts.
While the ban on related-party deals was also eased, the regulator refined the rules to permit only the cancellation and rollover of existing contracts, alongside transactions conducted with non-resident entities on a back-to-back basis. According to the directive, authorized dealers are still restricted from new related-party contracts outside of these specific exceptions, aligning with the master direction established in July 2016.
Despite these relaxations, the $100-million cap on net open positions remains a firm barrier. The RBI’s strategy appears to be a delicate balancing act: curbing speculative trading that could weaken the currency further while restoring liquidity and easing the path for genuine hedging.
The market remains volatile in the face of these changes. The rupee fell 19 paise on Monday to settle at 93.10. While the unit opened at 92.73 and hit an intra-day high of 92.70, it eventually gave up those gains as geopolitical tensions in West Asia drove dollar demand and kept crude oil prices steady.
Market participants have largely welcomed the move. Traders noted that liquidity had thinned significantly following the April restrictions, and the rollback is expected to restore normal hedging activity for businesses. As one private bank trader observed, the shift suggests the RBI is prioritizing market functionality while keeping a tight leash on the speculation that leaves the currency vulnerable.