The Reserve Bank of India (RBI) has partially withdrawn a set of measures introduced earlier this month to curb speculative activity in the rupee, signalling a change in its approach to managing currency volatility.
In a notification issued on Monday, the central bank said it is easing some of the restrictions imposed on April 1, even as it continues to retain safeguards to prevent excessive speculation in the foreign exchange market.
Under the revised framework, authorised dealers (ADs) are now permitted to resume offering non-deliverable derivative (NDF) contracts involving the Indian rupee to both resident and non-resident participants, reported PTI.
However, the RBI has placed a key restriction: authorised dealers will not be allowed to undertake foreign exchange derivative contracts involving the rupee with related parties.
The central bank clarified that certain exceptions will be allowed. These include the cancellation or rollover of existing contracts, as well as back-to-back transactions with non-related non-resident users.
The move effectively restores some normalcy in the derivatives market while maintaining oversight over potentially risky transactions.
The earlier restrictions were introduced in response to mounting pressure on the rupee, which had come under significant stress amid global and geopolitical developments.
According to the RBI, market participants had built positions that created an “artificial scarcity” of the US dollar, leading to heightened volatility in the currency market.
To counter this, the central bank had capped net open positions (NOP) in the rupee at $100 million and restricted authorised dealers from offering non-deliverable forwards.
These measures were aimed at curbing speculative bets and stabilising the currency.
The RBI’s intervention initially provided support to the rupee.
The cap on net open positions led to a sharp appreciation in the currency, although the gains proved short-lived and reversed within hours of trading.
Subsequently, the restriction on non-deliverable forwards had a more pronounced impact, with the rupee strengthening by over 2 per cent in a single trading session.
The central bank had indicated at the time that these measures were temporary and would be rolled back once market conditions stabilised.
Despite the easing of restrictions, the rupee continues to face external pressures.
In March, the currency weakened significantly, breaching the 95 per US dollar mark intra-day, a record low, amid concerns over escalating tensions in West Asia.
On Monday, the rupee opened at 92.73 and touched a high of 92.70 before slipping to a low of 93.24 during the session. It eventually settled at 93.10 against the US dollar, down 19 paise from the previous close.
The decline reflects continued demand for the US dollar, driven in part by geopolitical uncertainty and elevated crude oil prices.
The partial rollback suggests that the RBI is attempting to strike a balance between market stability and operational flexibility. By allowing the resumption of NDF contracts, the central bank is enabling greater liquidity and participation in the currency derivatives market.
At the same time, restrictions on related-party transactions indicate that the RBI remains cautious about potential misuse or speculative excesses.
This approach underscores the central bank’s broader strategy of intervening selectively rather than imposing prolonged restrictions.
For market participants, the move is likely to ease trading conditions and improve access to hedging instruments.
Non-deliverable forwards are widely used by global investors and corporates to manage currency risk, and their reintroduction is expected to support smoother functioning of the forex market.
However, the continued restrictions signal that the RBI will remain vigilant, especially in periods of heightened volatility.
