Rupee volatility: Muzzle price signals if necessary but act to close onshore-vs-offshore market gaps

The Indian rupee lost 10% against the US dollar in 2025-26, making it one of the worst performances in emerging markets. March alone saw a 4.24% drop, the steepest in any single month in six years, with the rupee briefly breaching the 95 level against the dollar. To defend the currency, the Reserve bank of India (RBI) sold dollars heavily from its reserves, which fell by $30.5 billion in March.

Crude oil at $115 per barrel was adding further strain. RBI then mounted a bold two-step intervention. It first capped banks’ net open rupee positions at $100 million.

That led banks to simply transfer their exposure to corporates and hedge funds, which then used the arbitrage between onshore and offshore rates to press further against the rupee. RBI then banned banks entirely from offering rupee non-deliverable forward (NDF) contracts to any client and forbade the rebooking of cancelled ones. The rupee responded with its largest single-day gain in over 12 years.

These gaps make RBI’s stiff action look justified. But there are also questions that outlast any single crisis. Can a price signal be gagged? An NDF is a derivative contract, settled in dollars, traded in financial centres such as London, Singapore, Hong Kong and Dubai.

Because the rupee is not fully convertible, non-residents who wish to hedge or speculate on the rupee use NDFs instead of the onshore market. Daily NDF volumes globally are estimated to be $150 billion, making the market large, liquid and informative.Market bids are a form of price discovery. When the NDF market signals sharp rupee weakness, it yields information about capital flow expectations, oil prices, global risk appetite and India’s current account trajectory.