RBI Governor Confirms NDF Curbs Are Temporary, Signaling Continued Confidence in Currency Markets

RBI Governor Assures Market on Offshore NDF Regulations​

Reserve Bank of India (RBI) Governor Sanjay Malhotra addressed market concerns regarding the recent restrictions placed on the offshore non-deliverable forwards (NDF) markets. He clarified on April 8 that these curbs are temporary measures and are not intended to signal any structural change in the financial landscape.

Speaking during the post-monetary policy press conference, Malhotra reassured participants that the directives were a reaction to specific, elevated market conditions. He emphasized that the RBI remains committed to the internationalisation and deepening of India's broader financial markets.

Root Causes of NDF Restrictions and Volatility​

Malhotra pointed to heightened volatility observed in the currency markets during March. He noted that this period saw banks building up significant positions, which consequently spurred arbitrage trades between the onshore and offshore NDF markets.

The Governor acknowledged that these linkages are crucial components in normal conditions, as they play an important role in achieving efficient price discovery. He stated that measures are only deployed when there is excessive volatility or excessive building up of speculative positions.

Market Reaction Following RBI Directives​

In the past two weeks, the central bank implemented stringent measures aimed at curbing excessive speculative trades within the offshore NDF markets. These actions reportedly compelled banks to unwind positions amounting to billions of dollars.

The initial market shock was visible when the rupee plunged to an all-time low of 95 against the dollar on March 30. This steep decline was fueled by dampened investor sentiment, which was exacerbated by elevated Brent crude prices.

Global Commodity Prices Influence on Currency Movement​

The currency fluctuation was particularly sensitive to global crude oil movements. Brent crude prices had zoomed 50 percent after the US and Israel launched strikes on Iran. However, subsequent ceasefire announcements caused crude prices to fall below the $100 mark.

Since the directives were introduced, there has been a visible reduction in the volatility of the rupee. Reflecting this, the rupee ended the current day at 92.58 against the dollar, marking a slight move from the previous session's close of 93.

Monetary Policy Stance Remains Unchanged​

On the policy front, the RBI kept the repo rate unchanged at 5.25 percent. This marks the second consecutive meeting where the rate was maintained. The central bank concurrently reaffirmed its "neutral" stance regarding monetary policy.