The Reserve Bank of India (RBI) announced new regulations on April 1, 2024, restricting access to Indian Rupee non-deliverable derivative (NDF) contracts for both resident and non-resident users, effective immediately. Authorized dealers are now prohibited from offering these contracts, a move that aims to deepen the divide between onshore and offshore currency markets and reduce spillovers from INR NDF markets to onshore currency weakness [1].
According to MUFG’s Senior Currency Analyst Michael Wan, these regulatory changes have led to several immediate market effects: higher NDF forward points and implied yields, wider NDF spreads versus onshore forwards, steeper FX forward curves, lower USD/INR forward outright in the NDF market, and a bigger move lower in USD/INR onshore, indicating a stronger INR in the short term [1].
Despite the near-term support for the Rupee, MUFG maintains a view that the fundamental flow picture for INR still points towards FX weakness over time. The analyst suggests that once the market adjusts to these regulations, there may be opportunities for clients to buy USD/INR at lower levels, anticipating structural INR depreciation and higher USD/INR rates in the future [1].
Wan also notes that if oil prices continue to rise in an adverse scenario, USD/INR could reach 97.50 or even higher, underscoring the potential for further Rupee weakness in the longer term [1].
CONCLUSION
RBI's regulatory clampdown has temporarily strengthened the Rupee and altered market dynamics, but analysts expect structural depreciation to resume once the market adapts. The outlook remains cautious, with higher USD/INR levels possible, especially if oil prices rise. Market participants are advised to monitor regulatory impacts and consider buying USD/INR at lower levels.