RBI bans banks from offering clients offshore bets on rupee

MUMBAI : In a bid to tighten its grip on currency markets, RBI has issued a fresh set of curbs on rupee-linked derivatives even as it moves to quell mounting pressure on the currency following recent geopolitical shocks.RBI has for the first time barred banks from offering non-deliverable derivative contracts involving the rupee to both residents and non-residents. These instruments, which are settled in dollars without any physical exchange of the rupee, had become a popular vehicle for offshore-style bets on the currency. By contrast, the central bank has preserved access to deliverable derivatives, such as forwards and swaps tied to actual underlying exposures, provided they are used strictly for hedging genuine trade or financial risks.RBI’s circular also clamps down on practices that blur the line between hedging and speculation. Banks are no longer permitted to allow clients to rebook cancelled foreign-exchange derivative contracts, a tactic often used to maintain positions without formally rolling them over. Lenders have been instructed to demand documentary evidence of underlying exposure, reinforcing the requirement that derivative usage remain anchored in real economic activity.

In addition, authorised dealers are barred from entering into such contracts with related parties, closing off avenues for intra-group transactions for multi-national lenders that could mask risk transfer or preferential dealing.

Issued under the Foreign Exchange Management Act, 1999, the directions take immediate effect and will remain in force pending review. In practice, this marks a decisive reversal from the stance adopted in 2023-24, when the RBI had expanded access to onshore non-deliverable derivatives for resident corporates under a regulated framework.The measures come close on the heels of the RBI asking banks to unwind their net open positions in foreign-exchange markets exceeding $100 million, in a bid to curb speculative demand for dollars. Together, the steps signal a coordinated effort to drain leverage and reduce volatility in currency trading.The measures come at a time when the rupee breached the 95-per-dollar level in March, weakening by 4% since the outbreak of the US–Israel–Iran conflict, as higher oil prices and risk aversion fuelled demand for the greenback. By shutting down nondeliverable routes and tightening onshore discipline, RBI is intent on reasserting control over price discovery in the rupee, even at the cost of reversing earlier liberalisation.