Non-Deliverable Forward (NDF) Market and Offshore Rupee Trading

A Non-Deliverable Forward (NDF) is a contract that lets someone bet on, or protect against, the future value of a currency without ever exchanging that currency. On the end date, the two sides only pay each other the difference between the agreed rate and the actual market rate, usually in US dollars. NDFs are mostly used for currencies like the Indian rupee that cannot be freely moved in and out of the country.

A large rupee NDF market exists offshore (outside India), in financial centres such as Singapore, London, Dubai and New York.

Why does the NDF market exist?

The rupee is fully convertible for trade (the current account) but not fully convertible for investment and capital flows (the capital account). Foreign investors and companies who are exposed to the rupee cannot always access India's onshore market freely. They may lack the documents Indian rules require, or find the process complex, or want to trade when Indian markets are shut. NDFs let them take a view on the rupee from outside India without touching actual rupees.

How does an NDF work?

Take a simple example.

1. A foreign investor agrees on 1 January to "buy" USD 1 million at ₹90 per dollar for settlement on 1 April.
2. No rupees will ever change hands.
3. On 1 April, the official fixing rate (a published reference rate) is ₹92 per dollar.
4. The investor gained, because the dollar is now worth more rupees. The gain is (92 − 90) × 1 million = ₹20 lakh, which is converted into dollars at ₹92 and paid as about USD 21,739.
5. If the rate had been ₹88 instead, the investor would have paid the difference.

Only the profit or loss moves, in dollars. The rupee NDF uses the benchmark rupee-dollar reference rate published in India as its fixing rate. Since 2018, this reference rate is published by Financial Benchmarks India Pvt. Ltd. (FBIL), which took over the job from the RBI.

Why does India worry about offshore NDFs?

Because the offshore and onshore markets are linked, prices in one quickly affect the other.

• Loss of control: The RBI cannot directly regulate trading in Singapore or London. During periods of stress, heavy one-way betting offshore can push the onshore rupee down.
• Price leadership: When Indian markets are closed (nights and holidays), the NDF market sets the mood, and the onshore market often opens at a gap.
• Arbitrage: Big players with access to both markets can profit from price differences between them, which can add to volatility.
• Business moving abroad: Trading that could happen in India happens offshore instead, so Indian banks and exchanges lose business.

Size of the market

The rupee is among the most actively traded NDF currencies in the world. According to figures cited by the RBI from the Bank for International Settlements (BIS) survey, average daily rupee NDF turnover was about USD 46 billion in April 2022. In April 2025, total average daily turnover in forex derivatives involving the rupee (all types, not just NDFs) was about USD 132 billion.

How has India responded over time?

• Task Force on Offshore Rupee Markets (2019): The RBI set it up in February 2019 under former Deputy Governor Usha Thorat. Its report came in August 2019. It said the onshore market should be made more attractive so trading moves home: allow rupee derivatives in the International Financial Services Centre (IFSC), let banks quote prices to non-residents at all hours, and extend market hours. It advised that Indian banks should not yet deal in offshore NDF markets.
• IFSC permission (2020): From 1 June 2020, banks with IFSC Banking Units (IBUs), such as those at GIFT City in Gujarat, were allowed to deal in rupee NDFs with non-residents.
• Wider access (2023): In June 2023, IBUs were allowed to offer rupee NDFs to resident non-retail users for hedging, settled in rupees.
• April 2026 curbs: As the rupee hit record lows, on 1 April 2026 the RBI barred Authorised Dealer banks from offering non-deliverable rupee derivative contracts to residents and non-residents, along with other limits. On 20 April 2026, it partly withdrew this, allowing such contracts again while keeping some restrictions (for example on related-party deals).

Commonly confused concepts

• NDF vs deliverable forward: In a deliverable forward, the full amount of currency is actually exchanged on the end date at the agreed rate (an importer actually receives dollars). In an NDF, only the difference is paid in cash.
• Onshore vs offshore market: The onshore market is inside India and fully under RBI rules. The offshore market is outside India, beyond direct RBI control.
• NDF vs currency futures: Futures are standard contracts traded on recognised exchanges (like NSE and BSE in India), with a clearing house standing in between. NDFs are over-the-counter (OTC) deals made directly between two parties.
• Current account vs capital account convertibility: The rupee has been fully convertible on the current account since August 1994 (when India accepted the obligations of Article VIII of the IMF's Articles of Agreement). It is only partly convertible on the capital account. The Tarapore Committees (1997 and 2006) laid out roadmaps toward fuller capital account convertibility.
• Hedging vs speculation: Hedging protects against a real exposure. Speculation is taking a position only to profit from price moves. The same NDF can be used for either.

Issues, criticism and the way forward

• Control vs openness: Curbs can calm the rupee in a crisis, but sudden bans can hurt genuine hedgers and drive business offshore. The quick partial rollback in April 2026 shows the balance is hard.
• Liquidity: Restricting onshore NDF access can thin out the market, making hedging costlier for real users.
• Global integration: Offshore trading in the rupee is also a sign of global interest in the currency. Bringing that trade to India, through GIFT City and longer onshore hours, is the long-term fix the Thorat Task Force suggested.
• Way forward: deepen onshore markets, ease documentation for genuine hedgers, grow GIFT City's role in rupee derivatives, and keep moving carefully toward fuller capital account convertibility, as recommended by the Tarapore Committees.

Concepts to Know

• Forward contract: An agreement today to buy or sell something at a fixed price on a future date.
• Derivative: A contract whose value depends on (is "derived" from) the price of something else, such as a currency, share or commodity.
• Convertibility: How freely a currency can be exchanged for foreign currency. Full convertibility means anyone can exchange any amount for any purpose.
• Fixing rate / reference rate: An official exchange rate published at a set time each day, used to settle contracts.
• Over-the-counter (OTC): A deal made directly between two parties, not on an exchange.
• IFSC (International Financial Services Centre): A special zone in India, such as GIFT City in Gujarat, where financial services are offered under rules similar to global financial centres, mainly in foreign currency.
• Net open position: The difference between a bank's foreign currency assets and liabilities that is not matched; it shows how much a bank stands to gain or lose if the exchange rate moves.