Definition
Non-Deliverable Forward (NDF)
An NDF is a cash-settled offshore currency forward where no actual exchange of the underlying currency occurs, used to trade or hedge restricted currencies like the rupee.
The rupee is not fully convertible, so foreign players who cannot freely access onshore INR trade the offshore NDF market in centres like Singapore, London and Dubai. At maturity, only the difference between the agreed NDF rate and the official fixing is settled in dollars.
The NDF market often moves USDINR before Indian markets open, and a wide gap between offshore NDF and onshore spot can signal speculative pressure. The RBI has worked to deepen onshore markets and let Indian banks operate in NDFs to reduce the offshore market's influence on the rupee.
Related terms
- Spot vs Forward Exchange RateThe spot rate is the price for settling a currency trade in the next two business days, while the forward rate is the agreed price today for delivery on a future date.
- USDINRUSDINR is the exchange rate of the US dollar against the Indian rupee, the most-watched currency pair in India and a key barometer of capital flows and import costs.
- RBI InterventionRBI intervention is the central bank's buying or selling of foreign currency in the spot, forward or futures markets to manage rupee volatility and liquidity.
- Capital Account ConvertibilityCapital account convertibility is the freedom to convert local financial assets into foreign assets and back at market rates without restriction, which India only allows partially.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.