Calibrating FX Rules Without Penalising Genuine Hedgers

The Reserve Bank of India’s latest measures, prohibiting authorised dealers from offering non-deliverable rupee derivative contracts to both resident and non-resident users, capping net open positions at $100 million, and barring the rebooking of cancelled derivative contracts, are a clear and coordinated response to genuine market stress. 

The rupee has faced significant pressure through 2025–26, driven by capital outflows, elevated oil prices, and heightened global risk aversion. The intent to stabilise is unambiguous, and the speed and coordination of the regulatory response reflect institutional resolve.

At the heart of the current debate is about cancellation and rebooking of forwards. This is where context matters.

Roll-overs of forward contracts have not been permitted in India for a considerable time.

Foreign Exchange Dealers' Association of India, with good reason, moved away from roll-overs precisely because the practice lacked transparency. Extending a contract at a historical base rate, with separate adjustments for market movements, obscured true Profit & Loss and left contract rates misaligned with prevailing market levels.

Cancellation and rebooking of forwards replaced this practice, crystallising P&L at the point of cancellation, rebooking at current market rates, and ensuring full transparency in both pricing and position management.

This was needed for market hygiene, and remains so.

The RBI’s current concern, however, is with the misuse of that mechanism. Specifically, frequent cancellation and rebooking of contracts against the same underlying exposure, with a speculative undertone, can distort the spot rupee and forward premiums, contributing to the very volatility the regulator seeks to contain. 

The difficulty lies in a regulation designed to address misuse potentially constraining genuinely compliant behaviour.

Hedger's Dilemma
Consider the practical reality facing an exporter today.

A forward contract is booked for 180 days against an expected receivable. The realisation is delayed, not by design, but by the disruption and uncertainty that has characterised global trade through this period. The RBI, recognising this reality, has extended the permissible realisation period, subject to the underlying exposure being real and documented.

However, under the current instruction, once that original contract is cancelled, participants assume that it cannot be rebooked against the same underlying. The genuine hedger, the exporter with a live, extended receivable, is left with an unhedged exposure through no speculative intent. This can increase unhedged exposure risk for customers and carry economic consequences.

The regulation, as currently constructed, does not distinguish between:

• Frequent cancellation and rebooking driven by positioning and trading intent,
• A single rebooking necessitated by a legitimate extension of an underlying exposure within the maximum tenure the RBI itself permits.

A refinement worth considering is to permit rebooking where the cancellation is directly attributable to an extended underlying, subject to the maximum tenure allowed under current guidelines, while restricting repeated cancellations and rebookings on the same underlying that signal trading rather than hedging behaviour.

There is a deeper point here that goes beyond the mechanics of any single regulation.

A determined participant who wishes to construct artificial exposures to game the system will, in practice, find a way. Every genuine foreign counterparty contract is a documentable exposure under current policy. The regulatory challenge of distinguishing genuine hedgers from sophisticated actors using the same instruments is real, and no single rule fully resolves it.

What endures, and what ultimately keeps markets honest, is something more structural: a trust-based ecosystem, anchored by the overarching responsibility of Authorised Dealer-banks.

AD-banks are not merely conduits. They are the first line of diligence, positioned to assess the pattern of client behaviour, the consistency of underlying exposures, and whether the totality of a client’s hedging activity reflects genuine risk management or market positioning dressed as hedging.

The regulatory framework is strongest when it places that responsibility squarely and explicitly on AD-banks, holding them accountable for the integrity of their client books, rather than relying solely on prescriptive transactional rules that may inadvertently burden the compliant while being navigable by the determined.

Calibrated guidelines, clear Authorised Dealer-banks’ accountability, and robust supervisory oversight together form a more durable architecture than broad restrictions applied uniformly across participant types.

The earlier policy trajectory, particularly through the GIFT City framework, was designed to bring offshore foreign exchange trading activity within a regulated, onshore-proximate ecosystem, deepening the market, improving price discovery, and laying the groundwork for a more internationalised currency. That vision remains strategically sound.

The current measures are a necessary response to acute stress. The constructive question for the medium term is how market integration, and the confidence it carries, can be methodically restored once conditions stabilise.

The internationalisation of the rupee, including its potential role in regional trade settlement, rests ultimately on the depth, liquidity, and policy predictability of India’s foreign exchange market architecture. These are qualities built over time, and each step that reinforces them compounds positively, for domestic participants and international counterparts alike.

The most resilient financial systems are not those with the most restrictive rules. They are those where regulatory intent, market architecture, and participant responsibility are in alignment, where genuine risk management is protected, speculative excess is contained, and Authorised Dealers bear meaningful accountability for the conduct of their books.

India’s financial markets have matured considerably. The institutional depth, the quality of its regulatory institutions, and the sophistication of its market participants are widely recognised across global markets. That is a strong foundation, and the basis for confidence that the current period of calibration will give way to a more durable and integrated framework.

This is Part I of a two-part series. Part II will examine how recent measures affecting non-deliverable forward markets and net open position limits intersect with balance sheet risk management, and what this means for market integration and confidence in the rupee.

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