The Reserve Bank of India has begun to rein in its ballooning non deliverable forwards book (NDFs), as sources say it has turned away from one of its primary tools to push back against the strong dollar.
Non Deliverable Forwards (NDFs) Book
A non-deliverable forward (NDF) book is a financial market that allows it’s participants to speculate and hedge in currencies that are not freely convertible. NDFs are basically a type of financial derivative contract that allows parties to lock in a future exchange rate for a specific currency pair.
Key Features:
- Settlement:
- NDFs are settled in cash, typically in US dollars, based on the difference between the agreed-upon rate and the actual market rate at maturity.
- No physical delivery:
- Unlike standard forward contracts, NDFs do not require physical delivery of currencies.
- Short-term contracts:
- They are basically short-term contracts between two parties.
