Non-Deliverable Derivative

 
Why in News?
As of April 1, 2026, the Reserve Bank of India (RBI) has strictly prohibited banks (Authorised Dealers) from offering NDD contracts involving the Indian Rupee (INR) to both residents and non-residents.
 
About

• Curbing Speculation: The move aims to stop "speculative games" and arbitrage trades that were putting extreme pressure on the Rupee, which recently fell near the ₹95/$ mark.

• Rupee Recovery: Following the announcement, the Rupee saw a sharp "relief rally," appreciating by over ₹1.70 to reach around ₹93.10/$ as speculative offshore positions were unwound.

• New Net Position Caps: Banks must now cap their "net open rupee positions" at $100 million, a significant tightening from previous limits based on bank capital. 

How They Work?

• Cash Settlement: At maturity, the "profit or loss" is calculated based on the difference between the contracted rate and the prevailing spot rate.

• Formula: Cash Flow = (NDF Rate - Spot Rate) × Notional Amount.

• No Delivery: Because the actual currency (like the Rupee) never changes hands, these trades often occur offshore in hubs like Singapore, London, or New York, outside the direct reach of local regulators. 

New RBI Restrictions (Effective Immediately) 

• No Rebooking: Banks can no longer allow users to rebook (cancel and re-enter) any forex derivative contracts, whether deliverable or non-deliverable.

• Related-Party Ban: Banks are barred from entering into INR derivative contracts with related entities (e.g., subsidiaries), preventing them from shifting losses within the same corporate group.

• Focus on "Genuine Hedging": Only deliverable contracts (where actual currency is exchanged) are now permitted for legitimate business needs, provided they aren't used to offset offshore NDD positions. 

Risks and Issues

• Market Distortion: NDD markets can distort "price discovery," as offshore traders' expectations may force the onshore Rupee value to drop even if domestic fundamentals are strong.

• Arbitrage: Traders often exploit the price gap between the onshore market (India) and the offshore NDD market, a practice the RBI is now actively shutting down to stabilise the currency.

• Counterparty Risk: Since NDDs are "Over-the-Counter" (OTC) and not traded on a formal exchange, participants face the risk that the other party might default on the cash payment.