- RBI announced new regulations on the Indian Rupee late Wednesday (1 April). In particular, authorised dealers are now prohibited from offering non-deliverable derivative contracts using the Indian Rupee to resident or non-resident users, and this change is effective immediately.
- This move comes on the back of recent limits on banks' onshore USD/INR positions of US$100mn each announced on 27 March, and is part of an increasing set of moves by RBI to manage currency weakness (see India – RBI limits on INR onshore positions: Can’t stop this train).
- News reports suggest corporates may have directly taken on INR NDF contracts post the new limits recently announced by RBI, and this may have been one reason why onshore USD/INR saw such a sharp reversal on Monday moving down to 93.50 initially before closing just shy of 95.00 levels, apart from other key factors such as fiscal-year end hedging and dollar demand needs.
- By closing this channel for non-banks to potentially engage directly in INR NDF markets, RBI is effectively increasing the bifurcation between onshore and offshore, and with the objective to reduce the spillovers from INR NDF markets to onshore currency weakness.
- In addition, if the recently announced US$100mn limits eventually stand, there will likely be more positioning adjustments moving forward as banks sell Dollars to close out existing positions by 10 April.
- The near-term market implications of these regulatory changes are as follows, and overall seems to be generally playing out at the time of our writing:
- Higher NDF forward points/implied yields, wider NDF spreads versus onshore forwards, and steeper FX forward curves
- Lower USD/INR forward outright in the NDF market
- Bigger move lower in USD/INR onshore (ie. stronger INR)
- Our key takeaways from these new developments are as follows:
- First, RBI seems quite serious to follow through on new regulations to control INR weakness. As such we think the chance of relaxation is much lower even as tweaks could still be possible
- Second, the level and pace of INR currency weakness looks to be reaching the point where it may be encroaching on RBI's overall policy objectives including forward-looking inflation, especially if one considers the large moves higher in global oil prices, and in time to come likely second round effects to higher food prices due to the Iran and Middle East conflict. With every 1% weakness in INR pushing up inflation by 7bps based on RBI’s own models, CPI inflation looks more likely to creep higher towards the 5% handle over time but also depending on duration of the Iran conflict and how much the government cushions the hit to consumers and farmers on the fiscal side.
- Third, RBI may also be implementing these changes now as traditional FX intervention may be reaching some practical limits and uncomfortable thresholds, including through RBI’s large net short position in its forward book. The official net short position is US$67bn as of Jan 2026 and latest media reports suggest this could potentially be larger now above US$100bn.
- Moving forward, further policy changes by RBI and the India government to manage INR weakness could be likely. These could include restrictions and higher import duties on gold and non-essential imports, dedicated facility/FX swap window by RBI for Oil Market Companies to tap Dollars instead of going to the market, and tightening Liberalised Remittance Scheme limits for example.
- If INR weakness continues unabated, we think that other policies tried in the past such as FCNR(B) subsidised swap windows to attract NRI deposits like what was done in 2013 are possible (and was done successfully then), although the cost now is much higher given where global/US interest rates are.
- In the pecking order, we think outright RBI rate hikes to defend INR is probably less likely at this time. Nonetheless, RBI may well tighten liquidity conditions in time to come and raise effective money market rates to make it more expensive for speculators to short INR.
- Our base case is for RBI to keep rates on hold during its 8 April policy meeting and to likely still maintain a neutral stance, but markets will likely focus on RBI’s communication on the likely path of policy and liquidity.
- Overall, we think the fundamental flow picture for INR still points towards FX weakness moving forward. As such once the dust on these regulations settle, we think it is still a good chance for clients to buy USD/INR if lower levels in the markets allow moving forward. For one, the capital inflow picture for India was already quite weak for India even before the Iran conflict, including through higher gross FDI repatriation (see India: Flows before growth – this time is different for INR). Second, the left tail risks from global factors such as higher oil prices from the Middle East conflict is still meaningful. If oil prices continue rising in an adverse scenario, we think that USD/INR at 97.50 and even higher could be possible (India – Strait of Hormuz closure: Not just about oil prices).
- From a rates perspective, we think INR 10-year yields are biased to rise further above 7% due to potential fiscal slippage and likely continued risk premia, and as such financing costs and interest rate structure are likely to increase from here both due to global and local factors.
