Reserve bank of India partially rolls back curbs on rupee derivative deals

On April 20, 2026, the RBI partially eased restrictions on rupee derivative transactions that had been imposed in early April 2026 to curb speculative activi...

What Happened

On April 20, 2026, the RBI partially eased restrictions on rupee derivative transactions that had been imposed in early April 2026 to curb speculative activity and contain rupee volatility.
The key rollback: Authorised Dealer (AD) banks may now offer rupee-denominated Non-Deliverable Forward (NDF) derivative contracts to both resident and non-resident participants, lifting the earlier suspension on offshore derivative activity.
The RBI simultaneously reinstated the facility for rebooking foreign exchange forward contracts, which had been temporarily suspended alongside the derivative curbs.
Remaining restrictions: Banks are still barred from entering into rupee derivative transactions with related entities (group companies, parent banks) except for contract rollovers or cancellations. The cap on banks' Net Open Position (NOP) in the onshore market also remains unchanged.
Following the partial rollback, the rupee fell approximately 0.4% to ₹93.49 per dollar on April 21, 2026 — reflecting that some of the curbs had been supporting the rupee's short-term level.

Static Topic Bridges

Non-Deliverable Forward (NDF) Market and Offshore Rupee Trading

A Non-Deliverable Forward (NDF) is a foreign exchange derivative contract settled in a hard currency (typically US dollars) rather than the domestic currency being traded. Because NDFs settle offshore without requiring actual delivery of Indian rupees, they can be traded in offshore financial centres (Singapore, London, Dubai, Hong Kong) by participants who do not have direct access to India's onshore forex market. The offshore rupee NDF market is substantial — often larger in daily volume than the onshore market — and its price movements can influence onshore sentiment and create one-way pressure on the currency.

NDF settlement: In USD (or another hard currency) based on the difference between the contracted forward rate and the RBI's Reference Rate on fixing date
Key NDF centres for rupee: Singapore, London, Dubai, New York
Offshore NDF volume: Often exceeds onshore forward/futures volumes during periods of elevated volatility
Participants: Foreign portfolio investors, global banks, hedge funds, Indian subsidiaries of MNCs managing currency risk
Onshore equivalent: Deliverable forwards and currency futures/options on recognised exchanges (NSE, BSE, MSE)

Connection to this news: The April 1 curbs restricted AD banks from participating in the offshore NDF market, effectively limiting offshore speculative activity against the rupee. The partial rollback on April 20 restored this channel while maintaining safeguards against related-party transactions that could be used to bypass intent.

RBI's Toolkit for Exchange Rate Management Under FEMA

Under the Foreign Exchange Management Act, 1999 (FEMA), the RBI has extensive powers to regulate foreign exchange derivative markets. It can issue directions to Authorised Dealer banks (commercial banks licensed to transact in foreign exchange), set Net Open Position limits (caps on unhedged forex exposure banks can carry), regulate the types of derivative products permissible, and control which counterparties can participate in specific markets. These tools — used in combination — allow the RBI to manage speculative positioning without permanently closing markets.

FEMA Section 10: Grants RBI authority over Authorised Dealer banks and their forex transactions
Net Open Position (NOP): The maximum unhedged currency exposure a bank can carry overnight; tightening NOP limits forces banks to reduce speculative positions
Contract rebooking facility: Allows exporters/importers to cancel and rebook forex forward contracts as their underlying trade exposure changes; suspension of this facility in March 2026 was a restrictive measure
Master Direction on Risk Management and Inter-bank Dealings: The primary RBI circular governing derivative transactions; frequently amended during periods of volatility

Connection to this news: The original April 1 curbs and the April 20 partial rollback are both exercises of the RBI's FEMA-derived regulatory authority. The phased approach — impose restrictions, observe market stabilisation, selectively lift restrictions — reflects the RBI's stated objective of containing volatility without permanently shutting market channels.

Foreign Exchange Derivative Markets in India: Structure and Regulation

India's currency derivative market has two main segments: the over-the-counter (OTC) market — bilateral contracts between banks and their clients — and the exchange-traded market on recognised stock exchanges (NSE Currency Derivatives Segment, BSE, and MSE). The OTC market includes forwards, swaps, and options; the exchange-traded market offers standardised rupee-dollar, rupee-euro, rupee-pound, and rupee-yen futures and options. In addition, cross-currency derivatives (not involving the rupee) are also available. The RBI regulates OTC derivatives; SEBI regulates exchange-traded currency derivatives.

OTC market regulator: RBI (under FEMA)
Exchange-traded currency derivatives regulator: SEBI
Eligible participants: Residents with underlying exposure (exporters, importers, borrowers in FCY); foreign portfolio investors; banks (for proprietary and client hedging)
Hedging requirement: As of earlier RBI Master Directions, retail participants (non-bank corporates) required to demonstrate underlying forex exposure for OTC forward contracts; some relaxations exist for small-ticket hedging
Related-party restriction (current): Banks cannot transact NDF contracts with related entities — this prevents capital arbitrage through intra-group currency positions

Connection to this news: The remaining restriction on related-party NDF transactions directly addresses the risk that a bank's Indian entity and its offshore parent could take offsetting positions that effectively circumvent the RBI's intent — a practice that the curbs were specifically designed to prevent.

Speculative Pressure and Currency Crises: The Policy Dilemma

When a currency faces one-way speculative pressure (everyone betting it will weaken further), derivative markets can amplify the move: offshore NDF contracts price in steeper depreciation → onshore forward market follows → spot rate comes under pressure → perception of fundamental weakness strengthens the bet. Central banks facing such dynamics must balance two risks: (a) allowing the depreciation to run, which validates speculative bets and can trigger a disorderly fall; and (b) spending reserves to defend a level, which depletes buffers and ultimately fails if the fundamental pressure is real. The RBI's approach in early 2026 — combining temporary derivative curbs with measured spot market intervention — represents a third path: buying time for market conditions to stabilise without exhausting reserves.

Currency carry trade: Borrowing in low-interest currencies (USD, JPY) to invest in high-yield assets (Indian bonds) — when these unwind, they create sudden depreciation pressure
Hot money flows: Short-term, speculative capital flows that exit rapidly during risk-off episodes
REER (Real Effective Exchange Rate): India's REER was assessed above fair value, creating legitimate fundamental pressure for rupee depreciation — making outright defense economically questionable
IMF Article IV consultation: Periodically assesses India's exchange rate policy; classification as "crawl-like" implies managed but not fixed

Connection to this news: The RBI's willingness to partially roll back curbs after just ~20 days signals that the speculative pressure had abated sufficiently — and that maintaining restrictions longer than necessary would harm market function, exporters' hedging needs, and India's credibility as an open capital market.

Key Facts & Data

Original curbs imposed: Approximately April 1, 2026 (following rupee volatility amid West Asia conflict)
Partial rollback: April 20, 2026
Rupee reaction: Fell ~0.4% to ₹93.49/USD on April 21 after rollback (curbs had been providing artificial support)
What was restored: NDF contracts (both resident and non-resident counterparties); contract rebooking facility
What remains restricted: Related-party NDF transactions (except rollovers/cancellations); NOP cap on onshore positions unchanged
NDF market: Offshore rupee derivative contracts settled in USD; key centres are Singapore, London, Dubai
Legal basis: FEMA, 1999 — Section 10 (RBI's Authorised Dealer powers)
India's exchange rate: approximately ₹93.49 per USD (April 21, 2026)
FY26 depreciation: approximately 9%
Forex reserves: approximately $700.9 billion (April 2026)
NOP (Net Open Position): Regulatory cap on banks' unhedged currency exposure — unchanged post-rollback