India Unleashes Curbs on Rupee Bets as Intervention Costs Swell

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The growth in offshore trading has long unsettled the RBI. When London overtook Mumbai as the top center for rupee trading in 2019, officials warned that offshore rupee trading was being driven by “speculators and arbitrageurs.”

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Most of this activity is in non-deliverable forwards — contracts commonly used in emerging markets, especially for currencies that are not freely traded — allowing investors to hedge or bet on future values without physically exchanging the rupee.

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The market’s rapid expansion has coincided with a persistent slide in the rupee, even as India remains one of the fastest-growing major economies, expanding at more than 7% annually in recent years. Capital markets have also grown, drawing about $16 billion from foreign investors into Indian bonds since their inclusion in JPMorgan Chase & Co.’s flagship index in June 2024.

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Yet the rupee has weakened more than 25% since 2019, underscoring the disconnect between strong domestic fundamentals and currency performance.

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The offshore market “exhibits exaggerated movements,” said G. Mahalingam, a former RBI executive director who was part of a 2019 task force set up to examine overseas rupee trading. “It takes the lead and the domestic market follows.”

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Root Problems

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Intervention alone has struggled to close that gap. The RBI was a net seller of $51.7 billion of dollars last year, the most on record, and has continued to step in during bouts of volatility, including at the onset of the Iran conflict. 

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The impact has been limited, highlighting the constraints of direct intervention when it runs up against broader macro forces like a strong dollar and shifting global risk sentiment. Other emerging-market currencies like the Philippine peso and South Korean won have also tumbled after the Middle East conflict broke out.

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“Trying to stem currency depreciation by putting the squeeze on offshore markets rarely has the intended effect of staving off speculative pressures,” said Eswar Shanker Prasad, senior professor of trade policy at Cornell University. “The root problems underlying a currency’s falling value need to be addressed.”

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With intervention proving costly, the central bank has widened its approach. Besides the limits on open positions, it has also proposed stricter reporting rules requiring overseas affiliates of lenders to disclose rupee-linked trades to a clearing house supervised by the RBI, in a bid to better understand who is driving offshore activity and why.

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The plan has met resistance. Global banks said it could breach client confidentiality, conflict with data and reporting rules in other jurisdictions and require major changes to their systems, data formats and legal agreements.

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“Some banks may need time to set up their reporting mechanisms, which could result in a temporary, limited decline in liquidity,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management.

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What Bloomberg Economics Says…

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Higher crude prices are a clear negative. The balance-of-payments hit will depend on the size of the oil shock. Channels beyond energy imports — capital outflows, weaker exports to the Middle East and higher fertilizer costs — could be as large or larger. The result: weaker growth, a softer rupee, falling FX reserves and tighter liquidity.

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— Abhishek Gupta, economist

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For the full report, click here.

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The push highlights a broader balancing act. Efforts to manage the exchange rate and curb speculative flows risk clashing with India’s longer-term goal of internationalizing the rupee — expanding its global use while reducing reliance on forex reserves.