RBI’s New FX Framework Signals Controlled Integration

The Reserve Bank of India’s draft directions on foreign exchange dealings look technical on the surface. In substance, they acknowledge a strategic reality: the rupee already trades across borders, and regulation must evolve from containment to calibrated integration.

The 2016 framework prioritised orderly development, with tighter controls on products, venues and overseas linkages. It expands permissible instruments, integrates offshore platforms under conditions, clarifies borrowing norms and simultaneously strengthens governance and reporting.

The most consequential change is the explicit recognition of offshore rupee non-deliverable derivatives. For years, the offshore non-deliverable forward market functioned as a parallel price discovery arena, sometimes diverging sharply from onshore signals. Instead of attempting to wall it off, the RBI has opted to bring authorised Indian institutions into that ecosystem under supervision. Authorised Dealer Category-I banks with International Banking Units can undertake INR non-deliverable derivative contracts, cash-settled in rupees or foreign currency.

Depth Over Segmentation
The permission to transact on RBI-authorised electronic trading platforms and certain regulated offshore platforms, provided they are based in FATF-member jurisdictions, reflects a pragmatic view of global liquidity. Exchange-traded derivatives on recognised domestic exchanges, IFSC platforms and selected overseas exchanges are also within scope for permitted contracts.

The thrust is clear: liquidity cannot be ring-fenced indefinitely in a world of mobile capital and electronic price discovery. The policy response, therefore, is to deepen participation while tightening oversight.

That counterweight is visible in the governance architecture. Net Overnight Open Position limits remain capped at 25% of total capital. Authorised Dealers must adopt board-approved forex policies and report exposures, including a split between onshore and offshore positions, through a revised Gaps, Position and Cash Balances framework. Consolidated reporting of non-deliverable derivative positions by banks with Indian presence expands supervisory visibility.

The flexibility granted at the trading edge is balanced by discipline at the balance-sheet core.

Guardrails and Gradualism
Borrowing provisions also indicate calibrated openness. Authorised Dealer Category-I banks may access overseas funding up to 100% of Tier I capital or $10 million, whichever is higher, subject to defined exclusions. Surplus foreign currency funds may be deployed in overnight placements, reverse repos up to one year and foreign state debt instruments. These measures recognise that Indian banks operate within an increasingly interconnected financial system.

At the same time, structured leverage remains constrained.

Gold hedging under the Gold Monetisation Scheme is permitted through overseas products, but net premium receipt in option structures is disallowed, signalling the regulator’s continued caution toward embedded optionality risk.

Foreign banks without a branch presence in India remain outside direct reporting jurisdiction under FEMA. That limitation is structural. However, transparency requirements on offshore electronic trading platforms narrow informational gaps, reinforcing indirect oversight.

The deeper message is about exchange-rate management. By allowing Indian banks to participate more fluidly across venues while consolidating risk reporting, the RBI appears to be shifting from venue-based control toward risk-based supervision. As offshore and onshore markets become more interlinked, arbitrage gaps may narrow, but global volatility will transmit faster. Integration enhances liquidity resilience, though it also compresses policy reaction time.

The planned October 1, 2026 synchronised implementation across foreign exchange and FEMA updates provides the system time to recalibrate processes and reporting frameworks. Yet the strategic direction is unmistakable. The RBI is preparing the rupee for a more globally contested trading environment without relinquishing supervisory grip.

This is not a leap toward fuller capital account convertibility. It is a measured step toward embedding the rupee within global liquidity networks while strengthening domestic risk architecture.