The Reserve Bank of India (RBI) has implemented new foreign exchange measures that have supported the spot Indian Rupee (INR), according to MUFG’s Michael Wan [1]. These actions included restricting non-resident access to non-deliverable forwards (NDFs) for speculative purposes, raising the cost of FX hedges, and providing state oil companies with a dedicated dollar window [1]. As a result, the spot INR rallied to the 95.2 level, appreciating by approximately 1.5% [1].
However, these measures have also led to a temporary disruption in derivatives liquidity. Offshore INR forward premiums fell sharply across all tenors between 12 and 13 October, indicating a rapid unwinding of offshore demand for INR downside protection after the RBI's restrictions [1]. Additionally, Reuters reported that USD/INR forward quotes were temporarily withdrawn due to uncertainty over whether the 20% cash-margin requirement applied to interbank trades, though the RBI later clarified that it did not [1].
Until formal clarification is issued, market participants are expected to remain cautious, which could result in wider bid-ask spreads, higher hedging costs, and a shift of activity to offshore markets [1]. The overall effect has been a reduction in speculative dollar demand and spot dollar buying, supporting the INR but at the expense of increased hedging expenses and less liquid onshore forward markets [1].
CONCLUSION
The RBI's recent FX interventions have strengthened the Indian Rupee and curbed speculative activity, but have also raised hedging costs and disrupted derivatives market liquidity. Market participants may continue to face higher expenses and reduced liquidity until further clarification is provided by the RBI.