CURRENT AFFAIRS | 2 APRIL 2026
CLAT GK + ECONOMIC LAW & CONSTITUTIONAL LAW
– Central bank regulatory powers under RBI Act 1934
– FEMA 1999 framework and authorized dealer system
– Article 246 and Union List Entry 36 (currency, foreign exchange)
– Economic sovereignty and currency defence mechanisms
What Happened: RBI Bans NDF Contracts
On 1 April 2026, the Reserve Bank of India (RBI) issued a significant notification directing all Authorized Dealer (AD) banks to immediately discontinue offering non-deliverable forex derivative contracts (NDFs) involving the Indian rupee to both resident and non-resident users.
The notification stated: “Authorised Dealers shall not offer non-deliverable derivative contracts involving INR to resident or non-resident users.”
This move comes amid severe currency volatility triggered by the West Asia conflict, which has seen the rupee depreciate by 4.5% since the war began on 28 February 2026, and over 11% during FY26. The rupee has hit a string of all-time lows, sliding to 94.84 against the US dollar.
Key Measures Announced by RBI
- NDF Ban — AD banks cannot offer non-deliverable derivative contracts involving INR to any users
- Deliverable contracts allowed — Banks can still offer deliverable forex contracts for genuine hedging, but must verify clients have no offsetting NDF positions
- No rebooking of cancelled contracts — Any forex derivative contract (deliverable or non-deliverable) cancelled after 1 April cannot be rebooked
- Related-party restrictions — AD banks barred from entering derivative contracts with related parties
- NOP Cap — A $100 million cap on net open positions was imposed last week, effective 10 April
1. FEMA 1999: The Foreign Exchange Management Act is the primary legislation governing all forex transactions in India. It replaced FERA 1973, shifting from criminal enforcement to a civil penalty regime.
2. RBI Act 1934 — Section 45W: Empowers the RBI to issue directions to banks and financial institutions regarding derivative transactions.
3. Article 246 — Union List Entry 36: Currency, coinage, legal tender, and foreign exchange are exclusively Union subjects under the Seventh Schedule. Only Parliament can legislate on these matters.
4. Authorized Dealer Framework: Under FEMA, only banks licensed by RBI as Authorized Dealers can buy, sell, and deal in foreign exchange.
What Are Non-Deliverable Forwards (NDFs)?
A Non-Deliverable Forward (NDF) is a short-term currency derivative contract where the parties settle the difference between the contracted rate and the spot rate at maturity, without actual delivery of the underlying currency. NDFs are typically used for currencies that have restrictions on convertibility, like the rupee.
The offshore NDF market had been pricing in steeper rupee depreciation compared to onshore markets, creating arbitrage opportunities. Speculative traders were exploiting this gap, further pressuring the rupee.
– Regulatory Powers: This is a textbook example of how the RBI uses its statutory powers under the RBI Act and FEMA to regulate financial markets during crises
– FEMA vs FERA: The shift from FERA (criminal penalties) to FEMA (civil penalties) is a frequently tested topic. Under FEMA, forex violations attract fines, not imprisonment
– Economic Sovereignty: The ban illustrates how India defends its currency using regulatory tools rather than capital controls
– Union List Powers: Foreign exchange regulation is an exclusive Central subject — states have no legislative competence here
Market Impact and Analysis
Market experts noted that the RBI’s message is “unambiguous” — the FX market should function as a hedging mechanism for real economic activity, not as a platform for leveraged speculation.
The ban on NDF contracts is expected to force banks to sell dollars, potentially leading to rupee appreciation. Currency dealers noted this curbs the basis trade arbitrage that had widened amid geopolitical tensions.
| Act | FEMA 1999 (replaced FERA 1973) |
| RBI Power | Section 45W, RBI Act 1934 |
| Constitutional Basis | Art 246, Union List Entry 36 |
| Rupee Fall (FY26) | 11% depreciation |
| NOP Cap | $100 million per bank |
| Effective Date | 1 April 2026 (immediate) |
F — Forward contracts (NDF) banned
O — Open position cap ($100M NOP)
R — Rebooking of cancelled contracts prohibited
E — Exchange only for genuine hedging
X — eXclude related-party transactions
Source: Business Standard, MarketScreener — 1 April 2026
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