A non-deliverable forward settles an exchange-rate bet or hedge in cash rather than exchanging a restricted currency. That small contractual distinction creates an offshore market that can insure investors against currency losses—and transmit speculative pressure into an onshore exchange rate that a central bank is trying to manage.
An Offshore Dollar Contract With No Delivery of Rupees
A non-deliverable forward (NDF) is an agreement today to settle the difference between a contracted exchange rate and a reference rate on a future fixing date. The parties usually exchange only a net cash payment in a freely convertible currency such as US dollars. Neither side must physically supply the underlying restricted currency. The BIS uses that exact distinction in its statistical definition of an NDF, while its longer-run research identifies capital controls and limited deliverability as principal reasons such markets exist. [1][2]
Consider an importer with future rupee expenses or a foreign fund holding local-currency bonds. The fund wants protection if the rupee depreciates but may be unable to access a deliverable dollar/rupee forward in its own jurisdiction. An NDF can replicate the exchange-rate hedge economically. The contract does not, however, produce rupees to pay an invoice, settle a local obligation or remit principal abroad. It is a cash-settled derivative, not a loophole that itself transfers restricted currency across borders.
That difference matters for legal rights. A deliverable forward usually creates contractual obligations to exchange the two currencies at maturity, subject to settlement and credit arrangements. An NDF produces a payment contingent on a fixing rate, together with collateral, close-out and counterparty risks. The foreign investor’s bond holdings, custody arrangements and repatriation rights remain separate. It is possible to hedge a currency loss without being able to liquidate the underlying asset or move the proceeds overseas.
The site’s breakdown of how SWIFT messaging differs from the transfer of money is useful context: the infrastructure conveying settlement instructions and the legal right to deliver restricted currency are different matters. NDF contracts remove the physical-currency settlement leg; they do not abolish settlement risk or regulatory boundaries.
The Cash Settlement Can Be Calculated Precisely
Take an illustrative USD/INR NDF with an agreed rate of 84 rupees per dollar, equivalent to $10 million of US dollar notional or ₹840 million of rupee reference notional. A party long dollars benefits if the rupee weakens, meaning the USD/INR fixing rises. The simplified dollar settlement is $10,000,000 minus ₹840,000,000 divided by the reference USD/INR fixing. If the fixing equals 88, the payment to the dollar-long side is about $454,545. At 80, the same party pays about $500,000. At 84, the payment is zero.
FIGURE 1 | Cash settlement from $10m long-USD NDF at INR 84 contract rate; excludes credit/fees.
TABLE 1 | The legal and cash-flow distinctions
| Feature | Deliverable FX forward | Non-deliverable forward |
| Principal exchange | Two currencies delivered | No underlying currency delivered |
| Settlement | Gross principal payments | Net cash difference at fixing |
| Cross-border constraint | Subject to currency controls | Still subject to derivatives rules |
| Key risk | Funding plus settlement risk | Fixing, basis and counterparty risk |
Source: Author’s analytical comparison; see Methodology and Sources.
The cash settlement is generally much smaller than the referenced notional for modest price changes, but notional is not a worst-case-loss ceiling. Large exchange-rate shocks, collateral calls, termination payments and default terms can create sizable obligations. Some contracts use alternative quotation conventions, fixing dates, settlement currencies or provisions that alter the formula; any real hedge must be assessed against its confirmation and applicable master agreement. The illustrative calculations assume a clean USD-settled fixing and omit bid-offer spread, margin costs and taxes.
A $10 million NDF is also not the same as a retail leveraged spot forex position or CFD. Both can create price exposure without delivery, but market access, eligible clients, documentary requirements, fixing methodology, clearing and enforceability differ. In particular, treating an institutional NDF quote as an executable price for a retail app user is misleading. Banks may require KYC, appropriateness assessment, hedging documentation or large minimum ticket sizes; some jurisdictions prohibit particular combinations altogether.
Why the Offshore Price Can Move the Onshore Exchange Rate
The most consequential new evidence came on October 16, 2026. BIS Working Paper 1383 uses transaction-level NDF flow cleared by LCH ForexClear for ten emerging-market currencies over a period extending to 2025. Its authors estimate that an additional $1 billion of net offshore dollar-buying pressure is associated with about 10 basis points of onshore currency depreciation within minutes, and an approximately 18-basis-point move in the offshore forward price. The estimated responses are sample relationships, not mechanical coefficients applying to every rupee, won or ringgit trade. [3]
FIGURE 2 | Published BIS sample coefficients displayed at hypothetical order-flow sizes; not forecasts.
This finding challenges a simple view of capital controls. Even if local currency cannot be freely delivered offshore, an NDF dealer managing dollar exposure may rebalance through spot transactions, deliverable forwards, swaps or domestic affiliates where permitted. Banks serving clients on both sides can transmit inventory and hedging demand from offshore to onshore. The size of the transmission depends on dealer balance-sheet capacity, limits on arbitrage and regulation. A border between markets changes the channel; it does not necessarily seal the markets apart.
The paper offers a valuable decomposition: speculative or hedging demand can move both offshore and onshore exchange rates, while intermediation constraints determine how far the two prices diverge. Its order-flow approach is more informative than merely looking at simultaneous movements in quoted rates. Yet identification remains an empirical question; an 18-basis-point NDF response does not imply traders can buy $1 billion and predictably earn 18 basis points. Feedback, liquidity, dealer behavior and changing regulations matter.
We model that finding at 0.25, 0.5, 1.0 and 2.0 billion dollars of signed flow by simple proportional scaling. The resulting spot moves of 2.5, 5, 10 and 20 basis points and offshore moves of 4.5, 9, 18 and 36 basis points are illustrative linear extensions of a published sample estimate, not forecasts or executable arbitrage opportunities. The economically important wedge is the offshore–onshore price difference, which can widen even when both prices move in the same direction.
The Central Bank’s Three Concerns: Pressure, Arbitrage and Visibility
First, an NDF offers an offshore expression of bearish currency demand that may not require the trader to obtain the domestic currency. Authorities defending a currency or trying to limit disorderly moves may worry that aggressive offshore positioning feeds back into spot trading, accelerates expectations of depreciation and amplifies importer demand for dollars. Restricting domestic banks’ access can weaken one transmission route. It cannot necessarily prevent two nonresident institutions from trading with one another overseas.
FIGURE 3 | USD reference notional versus the much smaller net cash transfer in one scenario.
Second, disconnected forward markets produce a basis, the gap between an onshore deliverable forward and an offshore NDF with similar maturity and fixing. If banks can arbitrage between them, they may expand positions that are profitable in stable conditions but create concentrated exposure and funding stress when the exchange rate jumps. If banks are abruptly forbidden to maintain or rebook positions, unwinding itself can produce large flows and volatile spreads. Neither unrestricted arbitrage nor total segmentation is costless.
Third, officials can have incomplete information about offshore gross positions, leverage and beneficial owners. A central bank’s foreign-exchange rules can promote reporting and constrain the ability of resident institutions to intermediate offshore trades. Authorities sometimes want to reserve derivative capacity for genuine underlying exposures rather than speculative carry trades. But proving which positions are hedges can be difficult: a foreign portfolio manager may hedge a genuine bond exposure while changing the hedge dynamically as prices or investments change.
Central banks therefore face an explicit trade-off. Restrictions may reduce immediate speculative activity and improve control of regulated dealers, yet they can also raise hedge costs, reduce liquidity, fragment price discovery and impair the risk management of genuine importers, exporters and foreign investors. A central bank that restricts hedging might inadvertently make the currency appear riskier, increasing the return international investors demand. The BIS historically notes that NDF markets often shrink as currencies become more freely deliverable—not simply because regulators outlaw derivatives. [2][4]
India in 2026: A Real-Time Experiment in Policy Reversal
India offers a particularly revealing sequence. After heavy rupee pressure in March 2026, the Reserve Bank of India imposed limits on banks’ net open rupee positions. On April 1, 2026, it introduced further restrictions on authorized dealers offering certain rupee non-deliverable derivatives to clients. These moves followed concern about the interaction between offshore NDF demand and positions banks had accumulated across markets. Contemporary Reuters reporting described aggressive unwinding and the governor’s position that the restrictions were not intended to be permanent. [5][6]
Crucially, the April 1 circular was withdrawn on April 24, 2026, restoring the ability to offer client NDF contracts under the applicable framework and reversing associated limitations on rebooking. A description claiming that the April NDF client prohibition remains in force would therefore be stale. The separate limits, later notices and actual eligibility of a proposed transaction must be checked at the trade date. This rapidly changing policy illustrates why headlines about a ‘ban’ or ‘liberalization’ cannot substitute for identifying the exact instrument, counterparty, residency category and current circular. [7]
The BIS October research uses changes in banks’ offshore access—such as India’s earlier 2020 liberalization and 2026 restrictions—to identify how the link between onshore and offshore markets changes. That is not evidence that all forms of NDF trading are illegal in India or that one policy mechanically fixes the rupee. The practical takeaway is narrower: bank participation affects the cost of connecting two markets, which changes the speed and distribution of exchange-rate pressure.
For an international business considering a rupee hedge, the operational questions are therefore: can its counterparty legally offer the chosen derivative, is the hedge permitted for the underlying exposure, which official fixing applies, will collateral be in dollars, and can proceeds of the underlying commercial transaction still be transferred? A profitable NDF hedge can coexist with delayed receivables, a trapped local bank balance or an expensive dollar conversion.
A Worked Basis Example: Why the Cheapest Quote May Be Misleading
Suppose a one-month offshore NDF is quoted at USD/INR 84.70 while a comparable onshore forward is quoted at 84.20. The 0.50-rupee gap is roughly 0.59% of the onshore rate. On a reference notional of $10 million, simply applying the percentage gives about $59,000 of rate-equivalent difference. It is not a guaranteed $59,000 arbitrage profit: contract fixing, convention, collateral, settlement dates, bid-offer spreads, trading limits and transaction restrictions must line up, and real payoffs are non-linear in the fixing.
A portfolio manager whose actual exposure is ₹840 million might choose an offshore contract for accessibility even though its forward rate is worse than an onshore quote that cannot legally be used. A bank facing a balance-sheet limit may charge more to intermediate an otherwise attractive basis trade. A trader may see a widening difference as an opportunity; the hedger experiences it as a higher insurance cost. These are transfers and frictions created by segmentation, not evidence that one printed price is universally ‘correct.’
Trading structure matters as much as price. The BIS 2025 survey found $9.6 trillion in average daily global FX transactions in April 2025, with outright forwards representing about 19% of turnover. That broad figure includes deliverable forwards and other arrangements; it must not be relabeled as an NDF-only volume statistic. For currencies under delivery restrictions such as INR, KRW and COP, BIS analysis highlights how derivatives activity concentrates in NDFs and how offshore market share differs across regimes. [8][9]
The Hedge Can Fail Even When the Direction Is Correct
Basis risk arises if the official fixing specified by the NDF differs from the rate at which a company actually converts an invoice. Settlement risk remains because a counterparty can default or demand collateral at an awkward time. Liquidity risk arises when bid-offer spreads widen before a macro event. Rollover risk appears if the exposure lasts longer than the contract, especially when the new forward rate is much worse. Legal risk arises if rules governing resident and nonresident participation change. An NDF pays cash; it does not directly solve any of those problems.
A firm that invoices a customer in local currency but pays a supplier in dollars should model both cash-flow timing and exchange-rate payout. Hedging only the invoice amount without synchronizing the fixing date and receipt date can leave a gap. For more conventional FX transaction mechanics, the explanation of how forex brokers hedge client flows shows the different role of the dealer and the underlying market. An institutional corporate hedge should nevertheless be priced under its own documentation, not with retail broker spreads.
A risk officer should compare at least three cases: the currency appreciates sharply, depreciates sharply, or changes little while the offshore–onshore basis moves. The last case is frequently ignored. It may produce a disappointing NDF outcome even though the company’s spot-rate forecast was broadly right. Credit support and collateral terms can also generate cash demands before the maturity payout offsets the underlying loss.
When Restrictions Might Work—and What Would Prove the Case Wrong
Restrictions could be useful when bank-intermediated offshore positions produce excessive short-term feedback into the domestic currency during destabilizing one-way positioning. Evidence of reduced speculative offshore flows, narrower disorderly volatility and minimal damage to genuine hedgers would support that case. But if the basis widens persistently, exporters lose affordable hedges, bid-offer spreads expand and offshore-to-onshore spillovers continue through other channels, a restrictive policy may merely move activity to less transparent venues.
The BIS study’s result is not an argument that more liberalization is always better. Nor is a momentary fall in the exchange rate proof that controls failed: an intervention can have objectives other than defending a particular level, including market functioning or reducing concentrated leverage. A fair evaluation needs before-and-after position data, volatility, depth, onshore–offshore basis, hedge costs and any concurrent central-bank dollar sales. Otherwise the analyst confuses intervention with the other macro forces moving the currency.
For a retail reader, NDFs are an example of why ‘offshore access’ and legal rights are different. Some offshore forex brokers offer synthetic exposure to the same emerging-market currency, but that does not mean the client holds an interbank NDF or enjoys institutional netting and documentation protections. Always identify the contracting entity, cash-settlement rule, leverage, client-money treatment and regulator.
Bottom Line
NDFs solve a real problem: they let institutions transfer currency risk without delivering a currency that may be difficult or illegal to move offshore. They also create a market whose prices and dealer hedges can transmit speculative pressure into domestic FX. Central banks restrict access when they judge the resulting leverage, arbitrage, reporting gaps or exchange-rate feedback to be destabilizing, but restrictions can make hedging more expensive and price discovery more fragmented. The policy question is not whether NDFs are inherently harmful; it is who can trade them, under what risk controls, and how much of the offshore price pressure reaches domestic households and companies.
Methodology
Settlement illustration uses USD-long payoff = USD notional − INR reference notional / final USD-INR fixing, for an illustrative 84 contracted rate, ₹840 million reference and $10 million notional. Rates and notional are fabricated for teaching, not current executable prices. Basis example 0.50/84.20=0.5938%; its dollar equivalent is an intuition aid rather than realized arbitrage profit. Order-flow sensitivity extrapolates published BIS 2026 10bp/18bp sample estimates linearly only for display. RBI chronology distinguishes the April 1 2026 measure from its April 24 withdrawal. Research cutoff October 24, 2026.
Sources
01 BIS — Definition: Non-Deliverable Forwards
02 BIS — Non-deliverable Forwards: 2013 and Beyond
03 BIS — Offshore Forwards and Exchange Rate Transmission — WP 1383 (16 October 2026)
04 BIS — Global FX Markets When Hedging Takes Centre Stage
05 Reuters — India: RBI FX Position and NDF Restrictions Not Permanent (8 April 2026)
06 Reuters — RBI Rupee Position Caps and Arbitrage Unwinding (30 March 2026)
07 Economic Times — RBI Withdraws April 1 Circular, Restores Client NDF Access (24 April 2026)
08 BIS — 2025 Triennial FX Survey: Turnover by Instrument
09 BIS — December 2025 Derivatives Markets and Central Clearing
10 RBI — RBI Bulletin: Rupee Markets and Reporting (August 2026)
11 RBI — RBI Bulletin: Evolution of Rupee Offshore NDF Market (2020)
12 IMF — Measures to Limit Offshore Use of Currencies, WP/01/43
Johan Shamshad is a financial markets writer at Dave Finances covering cryptocurrencies, trading platforms, brokers, fintech, financial regulation, and developments across global markets. He previously worked at Gulf News, adding newsroom experience to his coverage of fast-moving financial and digital-asset markets.
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