In a significant tactical reversal, the Reserve Bank of India (RBI) has withdrawn its controversial April 1 directive that restricted banks from offering Non-Deliverable Forward (NDF) contracts to clients and barred the rebooking of cancelled forex derivative trades.
The move is seen as an effort to restore liquidity and operational flexibility to the foreign exchange market, which had been under strain following a series of rapid regulatory changes.
Key Regulatory Reversals
The central bank’s latest notification effectively undoes several strict measures aimed at curbing speculation and managing the rupee’s volatility:
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NDF Access Restored: Authorized forex dealers can once again offer NDF contracts involving the Rupee to both resident and non-resident users.
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Rebooking Allowed: The ban on rebooking foreign exchange derivative contracts that were cancelled after April 1 has been lifted.
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Related Party Flexibility: Banks are now permitted to cancel or rollover existing contracts with related parties, provided they stay within specified limits.
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Back-to-Back Deals: Transactions with non-related, non-resident users on a back-to-back basis are again permissible within the overall limits.
Context: The April 1 “Clampdown”
The original restrictions were introduced to prevent banks from executing deals with corporate clients that might have masked losses or bypassed the $100 million Net Open Rupee Position (NORP) limit imposed in late March. By rolling these back, the RBI is acknowledging the need for “breathing space” for bank treasuries to manage genuine commercial requirements.
Market Impact & Expert Sentiment
While the move is welcomed as a step toward normalcy, industry sentiment remains cautious:
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Operational Relief: Analysts at Kotak Securities note that while this won’t drastically move the USD/INR exchange rate, it provides vital “room to trade” within the $100 million open position cap.
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Thin Volumes: Treasury officials report that trading volumes—both domestic and offshore—remain thin. There is a lingering “regulatory fatigue” among banks due to frequent shifts in RBI policy over the last month.
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Correction of “Unfair Punishment”: Market participants argue that the April 1 ban unfairly penalized banks for executing legitimate hedging transactions, and this reversal helps clear the air for genuine corporate hedgers.
Summary of Operational Limits (Post-April 20)
| Feature | New Status | Constraint |
| NDF Contracts | Permitted | Must fit within the $100M open position limit. |
| Rebooking Trades | Permitted | Allowed for contracts cancelled after April 1. |
| Related Party Trades | Permitted | Can be rolled over or cancelled. |
| Non-Resident Users | Permitted | On a back-to-back basis within limits. |
Disclaimer: This report summarizes recent regulatory updates from the RBI. Professional financial advice is recommended for institutions navigating forex compliance.
