India’s central bank steps up NDF activity to counter tariff impact on flows, bankers say

The Reserve Bank of India has intensified its intervention in the offshore non-deliverable forward (NDF) market, selling dollars to support the rupee, which recently hit a record low of 88.4550 per dollar. This action addresses rupee weakness driven by exporters withholding dollar sales and increased importer hedging due to U.S. tariff risks, reflecting a targeted approach to manage currency volatility without committing to a specific exchange rate. The strategy appears effective, as evidenced by a six-month low in one-month implied volatility, suggesting stabilized market expectations.

Analysis

The Reserve Bank of India (RBI) has escalated its intervention in the offshore non-deliverable forward (NDF) market to support the Indian Rupee, which recently depreciated to a record low of 88.4550 per dollar. The currency weakness stems from a supply-demand imbalance, with exporters withholding dollar sales while importers increase hedging activities in anticipation of potential U.S. tariffs. Evidence of the RBI's activity includes reported dollar sales when the rupee breached the 88.40 mark and the observed presence of the Bank for International Settlements (BIS) on the offer side of dollar/rupee NDF trades. The central bank's current strategy appears to prioritize managing volatility and ensuring orderly market conditions over defending a specific exchange rate level, a tactical shift aimed at preserving foreign exchange reserves. This approach shows signs of success, as one-month implied volatility for the rupee has declined to a six-month low, indicating that market expectations have become more anchored.

Key Decisions for Investors

• FX traders should note the RBI's strategy is to curb volatility rather than defend a specific exchange rate, implying that while sudden, sharp depreciation will be met with intervention, a gradual weakening of the rupee may be tolerated.
• Investors with unhedged INR exposure should consider the drop in implied volatility a near-term positive, but must remain vigilant to underlying pressures from trade-flow imbalances and potential U.S. tariff risks, which could trigger renewed currency weakness.
• The successful management of volatility may reduce hedging costs and support foreign portfolio flows into India, however, it is crucial to monitor exporter and importer behavior as a leading indicator of future pressure on the rupee.