Deepak Shenoy on what's happening with the rupee
A primer on how India's forex market works
Hi folks, Krishna here.
Over the past few weeks, the rupee has been moving around in ways that most people haven’t been able to fully explain. Some of it is straightforward — India imports a lot of oil, oil is now significantly more expensive, and that means we need a lot more dollars than we did before. But there has been another layer to the story, a more technical one, and that is what we wanted to dig into. So we got Deepak Shenoy on a call.
You can listen to the podcast on Spotify and Apple Podcasts.
The heart of the conversation was about something called the NDF market — non-deliverable forwards. It is essentially a market for betting on the rupee that operates entirely outside India, beyond the RBI’s direct reach. No rupees change hands, no dollars change hands — it is a cash-settled bet on where the rupee will land. Deepak called it the suited-booted equivalent of a dabba trade.
When the rupee came under pressure in recent weeks, this offshore market started showing higher dollar-rupee rates than the onshore market in India. Indian banks, seeing a gap between the two prices, started buying dollars cheaply in India and selling them at a higher price in the NDF market, pocketing the difference. The problem was that all this dollar-buying onshore wasn’t genuine import demand — it was pure arbitrage, and it was pushing the rupee down in the very market the RBI was trying to stabilise.
The RBI figured it out and capped each bank’s position at $100 million. Banks then tried to quietly transfer their positions to corporate importers to avoid taking losses on the unwind. The RBI caught on and shut that door too. What followed was a messy unwind that explains much of the rupee’s erratic movement over the past week.
The deeper point Deepak made is that none of this actually solves anything. Every time the RBI plugs one hole, the market finds another, because the incentives don’t disappear. His argument is that the real fix is to open the rupee up — more participants, fewer restrictions, genuine internationalisation. But that requires changes to law that are outside the RBI’s hands entirely.
This was a really good conversation. I hope you enjoy it.
And, if you are one of the few who prefers to read this instead of watching or listening, here’s the transcript.
