At a time when the world is witnessing serious repercussions of a geopolitical conflict, India has been battling hard to keep the rupee stable.
The last week has seen the currency following a roller-coaster trajectory. On the one hand, it plummeted to an all-time low value of 95.23 vis-à-vis the US dollar. However, it staged its strongest comeback against the greenback in 12 years on Thursday (April 2), thanks to an aggressive intervention by the Reserve Bank of India (RBI), to reach around 93.
Also read: Rupee at 95, Sensex in a spiral: Is India bracing for 2008-kind meltdown?
However, as economic challenges continue amidst global uncertainty, the question remains: will the rupee’s newfound strength sustain over the long term, or remain just a day’s surge?
RBI acts tough on NDF
The RBI took some significant steps to arrest the rupee’s fall, stopping banks from offering Non-Deliverable Forward (NDF) contracts to clients and limiting Net Open Position (NOP) limits to $100 million.
As the 2026-27 financial year kicked off on Wednesday (April 1), the central bank prohibited banks from offering NDF facilities—a mechanism involving some of the largest offshore trading volumes for the rupee.
The impact of this decision was not confined to India’s borders but also felt in global financial hubs such as Singapore and London, where such offshore transactions are typically executed.
According to estimates, these markets witness daily trading volumes amounting to approximately $149 billion. The immediate impact of such a measure was evident in the forex market on April 2 as the rupee surged by nearly 2 per cent against the dollar to recover from a low of 95 to approximately 92.8.
What is an NDF?
An NDF is a type of contract in which there is no actual exchange of currency; instead, the difference between the agreed-upon exchange rate and the prevailing market rate—whether positive or negative—constitutes the traders’ profit or loss, and only this difference is settled. Under this arrangement, there is no physical buying or selling of dollars or rupees.
Also read: Iran war tests India’s macroeconomic resilience, government data shows
Say, two parties agree that, six months from now, the exchange rate for the dollar will be Rs 85. If, six months later, the actual market rate for the dollar against the rupee turns out to be 90, then only the difference of Rs 5 is paid out under an NDF.
These contracts are typically utilised in countries where the local currency is subject to capital controls or restrictions on trading. Since investors in such regions cannot trade directly in the domestic market—in this case, India—they engage in speculative trading or “betting” on the rupee from abroad through the medium of NDFs.
Major entities—specifically large corporations (corporates), foreign investors, and banks—are the primary participants in this type of trading. Such transactions are predominantly executed in offshore markets—such as Singapore, Dubai, and London—and the settlement of these trades is conducted in US dollars.
Mounting pressure
But why did the RBI initiate such a step? The answer lies in the mounting pressure resulting from the persistent weakness of the rupee.
Speculative activity in offshore markets (via NDFs) had surged, and the market had become a playground for those seeking to generate easy profits from the rupee’s volatility.
The RBI has now made it unequivocally clear that the forex market is no longer to be used for speculative purposes, but rather for genuine business requirements—specifically, for hedging against currency risks.
Tightening leash on banks
On March 28, the RBI established a uniform limit of $100 million for the NOP across all banks. Previously, banks were permitted to hold dollar positions equivalent to up to 25 per cent of their capital base—a practice that increasingly facilitated speculative activities.
Following the imposition of this new limit, banks were compelled to offload their substantial dollar holdings and purchase rupees. As a direct consequence of this regulatory decision, banks were required to settle transactions exceeding an estimated $30 billion as soon as possible.
Also read: FPIs pull out Rs 21,000 crore from Indian equities amid Middle East tensions
The impact of this move by the RBI was indeed visible in the currency market on Monday (March 30). The rupee regained strength, albeit only for a few hours. Later that same day, the currency witnessed a sharp decline against the greenback, breaching the 95-mark for the first time, to reach 95.23.
Side effects of RBI moves
While these moves by the RBI brought relief, there could be some negative implications. For instance, market liquidity could diminish, foreign investors might turn cautious, and investment in the bond market could decline. Consequently, borrowing costs for the government could also rise.
The RBI has actually found itself in the middle of a critical balancing act. If it raises interest rates, the pace of economic growth would be adversely affected. Conversely, if it refrains from intervention, the rupee could face a precipitous decline.
Also read: Budget 2026-27: How the government earns and spends every rupee
The central bank has, therefore, opted to curb the speculative activity by intervening directly in the market. While this move has certainly given the rupee a boost, its long-term efficacy will hinge on how quickly the ongoing tensions in West Asia subside and crude oil prices stabilise.
MPC meeting on April 6-8
All eyes are now on the upcoming meeting of the RBI’s Monetary Policy Committee (MPC), to be held between April 6 and 8.
The committee, led by RBI Governor Sanjay Malhotra, will focus on ways to deal with inflationary pressures caused by skyrocketing oil prices and the ongoing conflict, which has imperilled global supply chains.
(The article was originally published in The Federal Desh.)
Comments are closed.