MUFG’s Michael Wan explains that recent RBI FX measures have supported spot Indian Rupee, while temporarily disrupting derivatives liquidity. Offshore INR forward premiums fell sharply after restrictions on non-resident NDF access and higher hedge costs. These actions reduced speculative Dollar demand and helped INR rally, though at the expense of wider bid-ask spreads and less liquid onshore forwards.

FX measures tighten INR hedging

“The RBI’s latest FX measures have supported spot INR to the 95.2 level but added some costs to rupee derivatives liquidity.”

“Reuters reported that USD/INR forward quotes were temporarily withdrawn amid uncertainty over whether the 20% cash-margin requirement covered interbank trades, although the RBI subsequently indicated that it did not.”

“Until formal clarification is issued, cautious market-making could widen bid-ask spreads, raise hedging costs and shift activity offshore.”

“We note that offshore INR forward premiums fell sharply across all tenors between 12 and 13 October. The broad-based move suggests that offshore demand for INR downside protection was rapidly unwound after the RBI restricted non-resident NDF access to genuine hedging, raised the cost of FX hedges and provided state oil companies with a dedicated dollar window.”

“Together, these measures reduced speculative NDF demand and spot dollar buying, helping INR rally by around 1.5%, albeit at the cost of higher hedging expenses and less liquid onshore forward markets.”