3 min readMumbaiUpdated: Apr 3, 2026 09:53 AM IST
The Reserve Bank of India’s (RBI) latest directive to bar banks from non-deliverable derivative (NDD) contracts in the rupee — often misused and manipulated by big currency players — marks a decisive shift toward tighter control and transparency in the foreign exchange market.
The move boosted the battered rupee, which had fallen below the 95 level against the dollar, to 93.10, a sharp rally of Rs 1.73 on Thursday (April 2).
By eliminating a key avenue for speculative exercise, the central bank is attempting to stabilise currency movements, hit hard by the rising oil prices and capital outflows in the wake of the West Asia conflict, and reinforce the primacy of the onshore market in the country.
What is the NDD market?
NDDs, which are typically traded outside India in financial hubs like Singapore, Hong Kong, London or Dubai, allow participants to bet on the rupee’s direction without actual delivery of the currency.
An NDD is a derivative contract where two parties agree on a future exchange rate for the rupee, but settle the difference in cash, usually in US dollars. As India has capital controls, offshore investors can’t freely trade in the rupee in physical form. This led to the creation of the NDD markets in the rupee. These instruments have long been criticised for distorting price discovery and manipulation as such an offshore sentiment can diverge sharply from domestic fundamentals and movements.
The NDD market is widely used by foreign investors, hedge funds and global banks who cannot freely access and play in the Indian rupee market, as well as by firms looking to hedge currency risk. These trades take place offshore, outside the control of the RBI. This often acts as a price discovery mechanism for the rupee, even influencing expectations before Indian markets open. The ban on NDD is aimed at curbing offshore speculation that often leads to rupee volatility.
Misuse of NDD market
The NDD market was also misused by some market participants. Previously, some participants would cancel and re-enter contracts to take advantage of favourable movements, effectively turning hedging tools into speculative instruments.
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Taking advantage of the geopolitical and trade tensions, big offshore traders sometimes take huge positions betting that the rupee will fall, impacting it in India’s onshore market.
“This was happening when the West Asia conflict started in late February. By disallowing this practice, the RBI is closing a loophole that enabled regulatory arbitrage,” said an analyst.
Another significant aspect is the RBI’s restriction on transactions with related parties. This move addresses concerns on intra-group dealings that could obscure true risk exposure or be used to shift profits and risks across jurisdictions. By aligning definitions with global accounting standards, the RBI is signalling its intent to bring Indian forex practices in line with international best practices, thereby boosting investor confidence.
In the near term, the rupee is likely to see reduced volatility as speculative trades diminish.
