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RBI tightens forex rules, bans non-deliverable Re contracts

April 01, 2026 5 min read Economics GS3 (Indian Economy Monetary Policy External Sector)
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What Happened

  • The Reserve Bank of India barred authorised dealer banks from offering rupee Non-Deliverable Forward (NDF) contracts to resident and non-resident clients amid sustained pressure on the rupee.
  • While banks may still offer deliverable foreign exchange derivative contracts for hedging purposes, they must ensure clients have not taken an offsetting position in the NDF market simultaneously.
  • Separately, RBI imposed a uniform daily cap of $100 million on the Net Open Position (NOP) in Indian rupees that banks can hold in the onshore deliverable market, effective April 10, 2026.
  • The earlier system allowed banks to set their own NOP limits up to 25% of their total capital; the new rule replaces this flexible approach with a fixed, uniform ceiling for all authorised dealers.
  • These measures aim to reduce speculative activity, close the arbitrage gap between the onshore spot market and the offshore NDF market, and stabilise the rupee exchange rate.

Static Topic Bridges

Non-Deliverable Forward (NDF) Contracts and the Offshore Rupee Market

A Non-Deliverable Forward (NDF) is a cash-settled forward currency contract where the notional principal is never exchanged. At maturity, the difference between the contracted forward rate and the prevailing spot (fixing) rate is settled in a hard currency, typically the US dollar. NDFs are used for currencies that are not freely convertible or where capital controls restrict onshore hedging.

The offshore INR-NDF market operates primarily in Singapore, Hong Kong, London, Dubai, and New York. It has grown into the second-largest NDF market globally by average daily turnover and is approximately three times larger than the onshore deliverable forward market. Because it operates outside RBI's direct jurisdiction, the NDF market can be used to take speculative positions on the rupee without onshore restrictions.

  • NDF markets develop organically for currencies with capital controls; India's NDF market gained depth after the 2008 financial crisis.
  • The arbitrage between onshore and offshore rates can amplify rupee volatility when large speculative positions build up in the NDF market.
  • RBI had begun integrating Indian banks into the offshore NDF market in 2019-20 to improve price discovery and allow better hedging; the latest ban reverses part of this liberalisation.
  • Under FEMA, 1999, currency derivative contracts involving the rupee are permitted only for the purpose of hedging genuine foreign exchange exposures.

Connection to this news: By banning banks from offering NDF contracts to clients and imposing the NOP cap, RBI is directly targeting the channels through which speculative pressure on the rupee is transmitted from the offshore market to domestic currency pricing.

Net Open Position (NOP) and Forex Risk Management for Banks

The Net Open Position (NOP) of a bank in a foreign currency is the net surplus or deficit of that currency across all on-balance-sheet and off-balance-sheet transactions, including spot, forward, and options positions. A large NOP exposes a bank to foreign exchange risk — if a bank holds a large short INR (long USD) position, a rupee appreciation produces losses.

RBI, as the banking regulator under the Reserve Bank of India Act, 1934, sets prudential limits on NOP to contain systemic foreign exchange risk. Previously, individual bank boards determined their own NOP limits subject to a ceiling of 25% of total capital, meaning larger, better-capitalised banks could take significantly larger positions. The new uniform $100 million cap removes this flexibility and levels the playing field.

  • The $100 million cap applies to NOP-INR in the onshore deliverable market at end of each business day.
  • Banks with NOP exceeding the cap must unwind positions by April 10, 2026, which could result in mark-to-market losses.
  • The measure effectively forces short-INR (speculative) positions to be closed, buying the rupee short-term relief.
  • Authorised dealers — typically scheduled commercial banks — are the primary entities subject to RBI forex regulations under FEMA.

Connection to this news: The NOP cap directly limits the size of speculative or arbitrage bets banks can hold, complementing the NDF ban and reducing the aggregate speculative short position against the rupee in the onshore market.

RBI's Role in Exchange Rate Management and Capital Account Regulations

The RBI manages India's exchange rate policy within the framework of a managed float system — the rupee's value is primarily determined by market forces, but RBI intervenes to prevent excessive volatility. This is distinct from a fixed exchange rate regime and from a fully free float. The legal basis for RBI's forex regulatory authority lies in FEMA, 1999 (which replaced FERA, 1973), and the RBI Act, 1934.

RBI's toolkit for exchange rate management includes: (i) direct market intervention — buying or selling USD in the spot market; (ii) use of forward and swap instruments to manage liquidity; (iii) prudential regulations on bank NOP limits; (iv) restrictions on specific derivative products; and (v) capital account management measures such as limits on external commercial borrowings.

  • India maintains a partially open capital account — current account transactions are fully convertible; capital account convertibility is partial.
  • FEMA (not FERBM or IPC) governs all foreign exchange transactions in India; contraventions are civil offences (unlike under the old FERA where they were criminal).
  • The Tarapore Committee (1997, 2006) examined full capital account convertibility; India has not yet moved to full convertibility.
  • RBI's foreign exchange reserves stood at approximately $650 billion before the recent period of rupee stress.

Connection to this news: The NDF ban and NOP cap are squarely within RBI's mandate to manage the exchange rate and maintain orderly forex market conditions, even as they represent a tightening of the liberalisation that had allowed Indian banks into offshore NDF markets.

Key Facts & Data

  • RBI imposed a uniform NOP-INR cap of $100 million per bank per day, effective April 10, 2026.
  • Earlier NOP ceiling: up to 25% of a bank's total capital (bank board-determined).
  • The offshore INR-NDF market is the second-largest NDF market globally by average daily turnover.
  • The NDF market is roughly 3x the size of India's onshore deliverable forward market.
  • FEMA, 1999 governs all foreign exchange transactions; currency derivatives are permitted only for hedging.
  • RBI had liberalised NDF participation for Indian banks starting 2019-20 to integrate offshore and onshore markets; the latest measures partially reverse this.
  • Major NDF trading centres for INR: Singapore, Hong Kong, London, Dubai, New York.