RBI U-turn! Reverses its April 1 decision, lifts ban on NDF contracts

The Reserve Bank of India has withdrawn its April 1 circular, lifting the ban on NDF contracts. This will provide greater flexibility to banks and companies. However, experts say the impact on the dollar-rupee is expected to be limited.

The Reserve Bank of India (RBI) has reversed its decision and withdrawn its April 1 circular prohibiting banks and authorized forex dealers from entering into non-deliverable forward (NDF) contracts with their clients. Additionally, the RBI has lifted the prohibition against rebooking foreign exchange derivative contracts cancelled after April 1. This decision will provide greater flexibility to banks and their clients.

Simply put, companies and investors will now be able to use forex contracts like NDFs again, allowing them to hedge their risk against fluctuations in the rupee's value. Previous restrictions had hindered many companies from renegotiating their old deals. Now, with this ban lifted, they will be able to renegotiate contracts as needed, reducing their risk. Furthermore, the forex market is also seeing some increased activity. This can be achieved because now transactions between banks and customers will be as smooth as before. In a short notice issued on its website, RBI said that the order of April 1, which prohibited the booking or rebooking of rupee-linked NDF contracts with resident and non-resident customers, has now been withdrawn. In fact, RBI took this step on April 1. The measures were taken to prevent banks from entering into trades with their corporate clients that could mitigate their losses. This decision followed a March 27 directive limiting banks' net open rupee positions to $100 million.

Which transactions were allowed?

The RBI has also clarified that banks can cancel or extend existing contracts with their related parties. Furthermore, back-to-back transactions with unrelated foreign clients are also permitted, but within prescribed limits. This means that banks have gained some freedom, but compliance with regulations remains essential.

How much relief did the banks get from the RBI decision?

Forex market experts say that this RBI decision has certainly provided some relief to banks. Now, banks will be able to enter into NDF contracts with their clients as before, but they must remain within the $100 million limit. This has made their operations a little easier. Anindya Banerjee, head of commodity research at Kotak Securities, says that this move by the RBI has helped. Banks have gained some room for trading. He explained that banks can now offer NDF contracts to their clients and rollover or cancel their deals with related parties as needed. However, he believes this will not have a significant impact on the dollar-rupee rate.