Key Moments
- RBI has immediately barred authorized dealers from offering INR non-deliverable derivatives to both resident and non-resident users.
- MUFG expects the new rules to widen the gap between onshore and offshore USD/INR markets while providing short-term support for the Rupee.
- Despite the regulatory squeeze, MUFG still anticipates structural INR weakness and considers higher USD/INR levels, including 97.50 in an adverse oil scenario, as possible over time.
Regulatory Action Targets INR NDF Market
MUFG’s Senior Currency Analyst Michael Wan reviews recent measures by the Reserve Bank of India (RBI) that restrict access to Indian Rupee non-deliverable derivatives and tighten conditions for onshore USD/INR positions. He argues that the new framework is designed to limit the influence of offshore trading on the domestic currency and to counter INR weakness in the near term.
According to Wan, the RBI has introduced rules that directly affect how market participants can use INR in non-deliverable derivative structures.
| Aspect | Detail |
|---|---|
| Announcement timing | “late Wednesday (1 April)” |
| Instruments affected | Non-deliverable derivative contracts using the Indian Rupee |
| Providers impacted | Authorized dealers |
| Users impacted | Resident and non-resident users |
| Effective date | “effective immediately” |
Wan cites the RBI’s move as follows: “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.”
Deeper Onshore-Offshore Segmentation
Wan notes that the prohibition on offering INR non-deliverable derivative contracts effectively shuts a key avenue for non-bank entities to participate directly in offshore INR NDF markets. In his view, this initiative is designed to further separate the behavior of onshore and offshore markets and dampen offshore-driven pressure on the domestic currency.
He writes, “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.”
Immediate Market Impact Highlighted by MUFG
Wan outlines how market pricing has been responding to the new environment around the time of his analysis. He describes a clear set of near-term consequences across forward, NDF, and spot markets.
In his words, “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 (i.e. stronger INR).”
| Market Segment | Observed/Expected Effect |
|---|---|
| NDF forward structure | “Higher NDF forward points/implied yields” |
| NDF vs onshore forwards | “wider NDF spreads versus onshore forwards” |
| FX forward curve | “steeper FX forward curves” |
| NDF USD/INR forwards | “Lower USD/INR forward outright in the NDF market” |
| Onshore USD/INR | “Bigger move lower in USD/INR onshore (i.e. stronger INR)” |
Strategic View: Near-Term Support vs Structural Weakness
While the regulations appear to offer short-term backing to the Rupee, Wan does not see them as changing the broader macro trajectory for the currency. He emphasizes that underlying flows, in his assessment, still point to eventual INR depreciation.
He states, “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.”
Oil Price Risk and Higher USD/INR Scenarios
Wan also flags the risk that a further rise in oil prices could intensify pressure on the Rupee. In that adverse case, he sees potential for USD/INR to move to materially higher levels than current pricing.
“If oil prices continue rising in an adverse scenario, we think that USD/INR at 97.50 and even higher could be possible.”
TradingPedia.com is a financial media specialized in providing daily news and education covering Forex, equities and commodities. Our academies for traders cover 
