Rapid Fire
RBI Ban on NDD Contracts
- 04 Apr 2026
- 4 min read
The Reserve Bank of India (RBI) has restricted banks’ participation in Non-Deliverable Derivative (NDD) contracts to curb offshore currency manipulation and stabilize the Indian Rupee (INR) amidst global geopolitical tensions.
- Following the directive, the Rupee staged a sharp recovery, rallying from below 95 to 93.10 against the US Dollar as speculative pressure eased.
- Another significant aspect is the RBI’s restriction on Related Party Transactions (RPTs), a move designed to prevent intra-group dealings from obscuring true risk exposure or being used to shift profits and risks across jurisdictions
Non-Deliverable Derivative
- About: A Non-Deliverable Derivative (NDD) is a financial contract used to hedge or speculate on currencies that are non-convertible or subject to strict capital controls.
- Unlike a standard derivative, where the underlying asset is physically exchanged, an NDD is settled strictly in a freely convertible currency (usually the US Dollar).
- Working Mechanism: In an NDD, there is no exchange of the "principal" amount of the two currencies. Instead, the parties agree on a "contract rate" and a "fixing date."
- On the fixing date, the market exchange rate (spot rate) is compared to the agreed contract rate.
- The difference between the contract rate and the spot rate is calculated. The "loser" pays the "winner" the difference in a convertible currency like USD.
- Key Features of NDDs:
- Offshore Trading: These are typically traded in offshore financial centers (like Singapore, London, or Dubai) to bypass the domestic regulations, like Capital Account controls of the home country. In India, NDDs, primarily in the form of Non-Deliverable Forwards (NDFs), are regulated by RBI.
- No Physical Delivery: The person never actually handles the "restricted" currency (e.g., Chinese Yuan, or Indian Rupee).
- Cash-Settled: Everything is resolved through a net cash payment in a major global currency.
- Concerns: These instruments have long been criticised for distorting price discovery and enabling manipulation, as offshore sentiment frequently diverges from domestic fundamentals.
- Some market participants misused the NDF market by cancelling and re-entering contracts to exploit price swings, effectively turning hedging tools into speculative instruments.
- Additionally, big offshore traders leverage geopolitical and trade tensions to take massive positions against the rupee, creating a downward pressure that impacts India’s onshore market..
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