RBI curbs widen dollar-rupee forwards-NDF spread

The difference between domestic dollar-rupee forwards and overseas non-deliverable forwards (NDF) widened as banks squared their positions by selling dollars in the local market and buying abroad after the Reserve Bank of India (RBI) prohibited banks from offering or rebooking any NDF contracts to their clients, reinforcing measures taken late last week to support the rupee.

Bankers said the gap widened steeply in the longer end as overseas investors and hedge funds were not big sellers of the US currency in the long end. The difference between one-month domestic forward and overseas NDF increased to about 50 paise from about 40 paise on Monday, but was higher at about 180 paise versus 130 paise in the sixmonth basket, currency dealers said. “Banks have all reversed their positions after RBI’s directions yesterday.

RBI clearly does not want banks to be active in this market. Banks and companies are now selling dollars domestically and buying in overseas NDF which is the opposite of what they were doing last month,” said a senior bank treasury official, who did not wish to be identified.

Forwards-NDF Spread

In a late evening notification on Wednesday, the central bank said banks cannot offer NDF contracts involving rupee to resident or non-resident users. Banks and other authorised dealers have also not been permitted to book again any foreign exchange derivatives contract, whether deliverable or non-deliverable, which was cancelled with immediate effect.

No exchange of the underlying currencies happens in NDF contracts, as the parties only settle the difference between the agreed and market rates. The rupee reacted instantly to RBI’s latest action, closing at 93.10 against the dollar, up from the previous close of 94.83, recording the biggest single-day gain since September 2013.

The latest move was a second blow to banks within a week after RBI on March 27 asked banks to cap their net open rupee positions in the onshore deliverable market to $100 million at the end of each business day with effect from April 10, far lower than the current limit of 25% of total capital. The latest change makes it more difficult for banks to pre-vent losses as they cannot even sell their contracts to clients.
“RBI has effectively made the NDF market untouchable for local banks and companies, first by limiting open position limits and then banning new NDF contracts for clients, too. That market will now be dominated by foreigners,” said another treasury official.
RBI first opened the NDF market to Indian banks in June 2020, and to resident Indians three years later, giving them an avenue to hedge their domestic currency positions.However, the central bank has also previously informally curbed trading in that market, particularly when the rupee was weak. But now, with official communication against trade in the market, banks will forever be wary of trading in the derivative instrument, bankers said. The central bank’s moves are aimed at curbing speculative currency trading at a time the West Asia crisis has pushed the rupee to an all-time low against the dollar.