RBI Ban on NDD Contracts:
The Reserve Bank of India (RBI) has restricted banks’ participation in Non-Deliverable Derivative (NDD) contracts to curb offshore currency manipulation and stabilize the Indian Rupee (INR) amidst global geopolitical tensions.Following the directive, the Rupee staged a sharp recovery, rallying from below 95 to 93.10 against the US Dollar as speculative pressure eased.Another significant aspect is the RBI’s restriction on Related Party Transactions (RPTs), a move designed to prevent intra-group dealings from obscuring true risk exposure or being used to shift profits and risks across jurisdictions.A Non-Deliverable Derivative (NDD) is a financial contract used to hedge or speculate on currencies that are non-convertible or subject to strict capital controls.Unlike a standard derivative, where the underlying asset is physically exchanged, an NDD is settled strictly in a freely convertible currency (usually the US Dollar).In an NDD, there is no exchange of the “principal” amount of the two currencies. Instead, the parties agree on a “contract rate” and a “fixing date.”On the fixing date, the market exchange rate (spot rate) is compared to the agreed contract rate.The difference between the contract rate and the spot rate is calculated. The “loser” pays the “winner” the difference in a convertible currency like USD.
