Indian cenbank shifts to NDFs as preferred FX intervention option, sources say

A woman walks past the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai

By Jaspreet Kalra, Nimesh Vora and Swati Bhat

MUMBAI (Reuters) -India's central bank is changing tactics in the way it seeks to limit rupee volatility with the use of non-deliverable forwards now overtaking spot market interventions, which draw heavily on foreign exchange reserves, sources said.

The Reserve Bank of India (RBI) has traditionally been more active in the local over-the-counter (OTC) spot market to keep the rupee stable.

But with its stated policy of boosting reserves, it is now opting to use NDFs more than OTC transactions, two people familiar with the bank's thinking told Reuters.

Dollar sales by the RBI in the spot market to slow rupee depreciation can draw heavily on reserves, while selling in the NDF market has a relatively marginal impact, the sources said.

Since counterparties only need to settle the difference between the contracted rate and prevailing spot prices in NDF trades, the impact on the central bank's FX reserves is lower than that from outright OTC purchases or sales.

The RBI has a stated policy of curbing excessive volatility, which has been a key factor driving foreign inflows.

"The RBI has been very active in NDFs. It is a great signaling tool to the market and also helps manage volatility without directly impacting forex reserves," one source said.

Neither of the sources wanted to be named because of the sensitivity of the issue. They also did not provide data on intervention volumes or the split between NDF and OTC transactions.

The RBI did not immediately respond to a request for comment.

The bank can influence the local spot market and set the tone for the day's session via NDF intervention, several traders Reuters spoke to said.

The RBI's NDF intervention is most active in the most liquid one-month tenor, traders said.

For example, at the peak of worries over the Iran-Israel confrontation, the RBI intervened in the NDF market ahead of the opening of the local OTC market, ensuring a relatively muted opening for the rupee.

While the RBI does not provide a breakdown of onshore versus offshore positions, the net outstanding position in the up to one-month bucket can be used as an indicative gauge of its interventions.

The aggregate outstanding position of the RBI in the segment climbed to nearly $94 billion in fiscal year 2023/24, from around $69 billion in 2022/23 and $60 billion in 2021/22, the latest monthly RBI data showed.

The RBI will, however, continue to buy dollars in the spot market whenever there are inflows as it wants to continue to actively build its reserves stockpile, the first source familiar with the central bank's thinking said.

It bought $13.25 billion on a net basis in March, the highest monthly addition since October 2020, according to its latest monthly bulletin.

"Market conditions dictate whether the RBI can manage the market movements with NDF interventions or if it needs to go into the (onshore OTC) spot market as well," the second source said.

(Reporting by Jaspreet Kalra, Nimesh Vora and Swati Bhat; Editing by Nivedita Bhattacharjee and Sam Holmes)