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MUFG’s Senior Currency Analyst Michael Wan analyzes new RBI measures restricting Indian Rupee non-deliverable derivatives and recent limits on onshore USD/INR positions. He argues these steps deepen the divide between onshore and offshore markets and aim to curb INR weakness. Despite near-term Rupee support, MUFG still expects structural INR depreciation and sees higher USD/INR levels as likely over time.
RBI clamps down on INR NDF access
“RBI announced new regulations on the Indian Rupee late Wednesday (1 April). In particular, authorised dealers are now prohibited from offering non-deliverable derivative contracts using the Indian Rupee to resident or non-resident users, and this change is effective immediately.”
“By closing this channel for non-banks to potentially engage directly in INR NDF markets, RBI is effectively increasing the bifurcation between onshore and offshore, and with the objective to reduce the spillovers from INR NDF markets to onshore currency weakness.”
“The near-term market implications of these regulatory changes are as follows, and overall seems to be generally playing out at the time of our writing: Higher NDF forward points/implied yields, wider NDF spreads versus onshore forwards, and steeper FX forward curves Lower USD/INR forward outright in the NDF market Bigger move lower in USD/INR onshore (ie. stronger INR).”
“Overall, we think the fundamental flow picture for INR still points towards FX weakness moving forward. As such once the dust on these regulations settle, we think it is still a good chance for clients to buy USD/INR if lower levels in the markets allow moving forward.”
“If oil prices continue rising in an adverse scenario, we think that USD/INR at 97.50 and even higher could be possible.”
