【Forex Trends】India's central bank takes action to curb speculation, restricts offshore trading to support the rupee, which gains the most against the US dollar in over 12 years

Indian rupee versus U.S. dollar broke below the 95 level for the first time since Wednesday (the 1st), reaching an all-time low of 95.235 per $1. On Thursday, it then surged 1.7% at one point to 93.25 rupees per $1, marking the biggest one-day gain since September 2013. The Reserve Bank of India (RBI) has recently rolled out a package of measures that are the strictest in more than a decade, banning domestic banks from using the most popular tool in offshore rupee trading, aiming to curb speculative activity and support the rupee exchange rate this year, which has repeatedly hit record lows. This extreme move could impact the offshore market, where daily trading value is as high as $149 billion.

Since the Iran war intensified and the rupee’s downward trend accelerated, the pressure on the exchange rate has further increased. India’s first measure was announced last Friday (the 27th): regulators set a cap on banks’ daily onshore currency positions at $100 million. The decision prompted banks to urgently close at least $30 billion worth of arbitrage trades.

However, the rupee exchange rate continues to hit new lows. The central bank has taken further action by banning banks from offering onshore and offshore users non-deliverable derivatives contracts involving the rupee. The offshore market’s average daily trading volume is $149 billion, about twice the size of the onshore market.

“This sends another signal that the central bank is willing to consider taking harsh—even backward—measures. At present, its focus is on the rupee’s stability rather than liquidity.” Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership, said.

May lead to a decline in liquidity

Kunal Sodhani, head of treasury at Shinhan Bank’s Mumbai branch, said these measures amount to coordinated action, aimed at removing excessive bearish rupee positions and speculative trades from the market, which could lead to a decline in liquidity and widen the price spreads between the onshore and offshore markets.

Sodhani emphasized that the authorities’ message is very clear: the foreign exchange market should serve as a hedging tool aligned with real-economy activities, not a platform for leveraged speculation.

However, market analysts believe these regulatory measures may affect India’s efforts over many years to promote freedom in the money market. In recent years, liquidity in both India’s onshore and offshore markets has increased significantly, which has long been an important factor in attracting foreign capital and also aligns with the direction promoted by Prime Minister Modi to internationalize the rupee.

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