The Reserve Bank of India, through Circular No. RBI/2026-27/04 dated April 1, 2026, prohibited authorised dealers from offering non-deliverable derivative (NDD) contracts involving the Indian Rupee to both resident and non-resident users. The circular, issued under Sections 10(4), 11(1), and 11(2) of the Foreign Exchange Management Act (FEMA), 1999, also banned forex derivative transactions with related parties and barred the rebooking of cancelled INR derivative contracts. The restrictions took immediate effect.
Background
The Indian Rupee faced sustained depreciation pressure through Q1 2026, driven by a combination of global dollar strength, elevated crude oil prices, and portfolio outflows from emerging markets. The RBI had already tightened its Net Open Position (NOP) limits for banks in a series of measures through March 2026, signalling its intent to curb speculative rupee positions.
Non-deliverable derivatives, which are settled in cash without actual delivery of the underlying currency, had become a vehicle for speculative positions against the Rupee. The onshore NDD market, while smaller than the offshore NDF market centred in Singapore and London, provided an additional channel for short-rupee positions that the RBI sought to eliminate.
MUFG Research had flagged in a March 2026 report that the tightening of INR NDF regulations was driving a wedge between onshore and offshore markets, a dynamic the RBI appears willing to accept in pursuit of rupee stability.
Key Provisions
The circular imposes three distinct prohibitions:
NDD ban: Authorised Dealers are prohibited from entering into non-deliverable derivative contracts of the Indian Rupee with any user, whether resident or non-resident. Only deliverable contracts involving actual exchange of currencies for genuine hedging remain permissible.
Related party restriction: Authorised dealers cannot undertake any foreign exchange derivative contract involving the Rupee with their related parties, eliminating a potential channel for intra-group speculative positioning.
No-rebooking rule: Users who cancel any foreign exchange derivative contract involving the Rupee (whether deliverable or non-deliverable) after April 1, 2026, cannot rebook the same contract. This prevents rolling of speculative positions through cancellation-and-rebooking cycles.
Deliverable contract offset prohibition: Users holding legitimate deliverable contracts cannot offset those positions in the NDD market, ensuring that the deliverable contract ecosystem remains ring-fenced from speculative activity.
Implications for Practitioners
This circular significantly constrains the hedging toolkit available to corporate treasuries and financial institutions. Companies that previously used NDDs for cost-efficient currency risk management must now restructure their hedging strategies around deliverable forward contracts.
For foreign portfolio investors (FPIs) and non-resident entities, the prohibition eliminates onshore NDD access entirely, forcing rupee hedging activity to offshore NDF markets or deliverable contracts through Indian authorised dealers.
Banking lawyers advising authorised dealers must conduct immediate compliance reviews of their existing NDD book. While the circular does not require unwinding of contracts entered before April 1, 2026, no new NDD contracts can be originated, and cancelled contracts cannot be rebooked.
The related party restriction has particular significance for bank groups with multiple entities: forex transactions between a bank and its subsidiaries or associates involving the Rupee now require restructuring to comply with the prohibition.
Frequently Asked Questions
Are existing NDD contracts entered before April 1, 2026 affected?
The circular prohibits the origination of new NDD contracts from April 1, 2026. Existing contracts entered before this date can run to maturity. However, if an existing NDD contract is cancelled after April 1, 2026, it cannot be rebooked, effectively preventing the rolling of pre-existing speculative positions.
What are the penalties for non-compliance with the NDD ban?
Violations of directions issued under FEMA carry penalties prescribed under Section 13 of the Act, including monetary penalties up to three times the amount involved in the contravention, or Rs 2 lakh where the amount is not quantifiable. The RBI's Enforcement Directorate handles adjudication of FEMA contraventions.