DBS Group Research economist Radhika Rao discusses new Reserve Bank of India (RBI) measures aimed at defending the Indian Rupee (INR). The RBI has barred banks from offering rupee NDF contracts to residents and offshore users while keeping deliverable hedging channels open. Rao notes this may widen the onshore–offshore gap and that geopolitical risks and a possible third straight balance of payments deficit could keep the Rupee under pressure.

RBI steps up defence of INR

"In a move to further curb speculative trades and as a follow up to the change in the FX playbook last week, the RBI further tightened regulations on late Wednesday, by disallowing banks from offering rupee non-deliverable forward (NDF) contracts to resident and offshore users. Authorised dealers can continue to offer deliverable FX derivative contracts to users to meet their hedging requirements provided that the user does not undertake offsetting non-deliverable derivative positions."

"This additional notification seeks to close the arbitrage window that had opened between the onshore and NDF markets after the previous directive, which had spurred a surge in corporate interest (as banks unwound), according to the wires."

"To recall, the RBI had earlier sought to curb banks’ daily net open positions in the onshore deliverable rupee market, effective April 10."

"Besides a strong open for the INR when trading resumes on Thursday in this holiday-shortened week, this additional ruling is expected to further widen the gap between onshore and offshore markets."

"Beyond these measures and on a more structural basis, markets will remain focused on geopolitical developments (oil prices jumped post-US speech this morning), in midst of which rupee could remain under pressure from the risk of a third consecutive year of balance of payment deficit."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)