India to require reporting of offshore rupee derivatives

India is moving forward with a regulatory proposal that mandates banks to report offshore rupee derivative trades, according to sources familiar with the matter. This initiative by the central bank is designed to increase transparency in a market that has frequently amplified pressure on the domestic currency. The Reserve Bank of India (RBI) initially proposed in February that lenders disclose foreign exchange derivative transactions conducted globally by their related parties to facilitate more efficient price discovery.

The central bank's objective is for financial institutions to begin sharing data on at least 70% of these derivative transactions starting in February 2027. While domestic banks are already required to report all transactions, including those from their overseas offices, foreign lenders currently only provide data for trades executed by their Indian units. This discrepancy has led the RBI to seek a more level playing field between local and international institutions.

"There was no clarity on what these NDF trades were, making the RBIs task complicated," the person said.

The large offshore non-deliverable forward (NDF) market maintains a substantial influence over the USD/INR exchange rate. Data from the Bank for International Settlements indicates that cross-border trades involving the rupee reached approximately $60 billion in April 2025, representing nearly two-thirds of the total turnover in the outright forward market. Recently, the RBI has taken steps to curb trades that exploited price differences between the NDF and local forward markets, with such positions estimated at $40 billion.

"Such trades by banks were adding to FX market volatility," RBI Governor Sanjay Malhotra said on Wednesday.

Following the unwinding of these positions, the rupee has strengthened toward 92.50 per dollar, recovering from previous record lows near 95. Despite the central bank's resolve, foreign banks have expressed resistance, citing potential conflicts with the legal jurisdictions where the offshore trades occur. Treasury officials have noted that implementing these requirements could be challenging due to the need for international coordination between central banks.

"The claim that reporting requirements are extra-territorial does not stand," the second source said.

Lenders licensed to operate within the country are expected to comply with reporting requirements for rupee transactions, as the central bank maintains that such trades fall within its regulatory purview regardless of where they are executed. The RBI did not immediately respond to requests for official comment regarding the timeline or the pushback from international lenders.