The Reserve Bank of India (RBI) recently lifted restrictions on Non-Deliverable Forwards (NDFs) and on rebooking foreign exchange contracts, which had been put in place to prevent the rupee from falling further.
However, most Indian banks are refusing to offer these services to their clients. Bankers are staying cautious because the RBI previously expressed strong dissatisfaction with “arbitrage” trades, in which companies exploit price differences between local and international markets to make quick profits.
Treasury officials fear that if they resume these trades too quickly, they will face intense regulatory scrutiny and compliance risks. Furthermore, the financial incentive for these trades has disappeared.
During the recent market turmoil, the price gap between onshore and offshore rates was nearly one rupee, but that difference has now shrunk to just a few paisa. Because the potential profit is so low, banks do not want to risk upsetting the central bank, which remains highly watchful of any suspicious currency activity.
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While the RBI’s intent is to help businesses with genuine hedging needs, market participants are treating the situation with “heightened caution” rather than returning to business as usual.
