Don't fear global liquidity integration, strengthen oversight instead: RBI’s Rohit Jain

Mumbai: India’s foreign exchange markets should not fear integration with global liquidity but work to strengthen risk management and oversight, according to Reserve Bank of India (RBI) deputy governor Rohit Jain.

Citing the recent central bank crackdown on forex positions in offshore markets, Jain said a build-up of “unhealthy arbitrage positions” linking the onshore deliverable and offshore non-deliverable forward (NDF) markets in late March and early April this year prompted calibrated measures.

Amid sustained pressure on the Indian rupee, the RBI introduced a $100 million cap on net open positions in the onshore market on 27 March. On 1 April, it barred banks from offering rupee-linked NDFs, noting exploitation by certain corporations.

The RBI partially withdrew some of the curbs on 20 April, once the rupee stabilised. While banks can now undertake certain related-party transactions, including cancelling and rolling over existing contracts and deals via the back-to-back route, they are still barred from undertaking all foreign-exchange derivative transactions with related parties. The $100 million cap on net open positions also remains in place.

Also Read | Navi’s UPI growth fuels NBFC arm’s loan expansion

“Some of these measures have since been reversed. As the market integrates further with global liquidity, the lesson is not to fear integration but to further strengthen risk management, governance and oversight arrangements,” Jain said at the Annual Day of the Foreign Exchange Dealers’ Association of India (FEDAI) on 14 August. The speech was released by the RBI on Thursday.

India’s foreign exchange reserves are currently around $691 billion. The average daily turnover in the domestic forex market – spot and derivatives combined – is about $80 billion at present, whereas the notional outstanding in rupee derivatives is around ₹130 trillion. Offshore activity, as per NDF turnover, is at about $7 billion a day, while the onshore-offshore spread has narrowed as integration has deepened, Jain said.

Set up in 1958, FEDAI was recognised as the self-regulatory organisation for authorised forex dealers in January 2026. In his speech, Jain highlighted four drivers for forex markets for the next decade:

delegation through risk-based reporting and greater reliance on board-approved policies to reduce the burden on customers;
customer-centric business processes;
cross-border trade in local currencies, and
leveraging technology.

FX-Retail pricing

The FX-Retail facility has given individuals and small businesses direct access to competitive interbank pricing since 2019, but its usage has remained modest—not due to shortcomings in the platform’s design but by uneven bank onboarding and low customer awareness, Jain said.

“Nowhere is the gap between regulatory intent and market outcome wider than in retail forex pricing,” hesaid, adding that instead of expecting customers to change their behaviour to get a fair price, banks should strive to bring the fair price into the channel they already use. “I would urge AD (authorised dealer) banks to treat onboarding as a service standard this year, not as a compliance checkbox visited only when the RBI asks.”

Also Read | Retail lending slows at banks in Q1 as corporate loans pick up pace

Jain called out banks for inconsistent market and customer practices and pricing for retail FX payments, saying the RBI’s supervisory exercise found multiple documentation requirements and delays in executing cross-border remittances. The review also revealed gaps in banks’ policies governing customer transactions, references to schedule of charges or grievance policy, and vague communication in outward remittance documentation.

“The progress on this needs to be better,” Jain said. “These are not difficult problems. They get fixed when officials of the AD themselves go through what the customer experiences and make the necessary improvements.”

Jain also highlighted the need to expand the use of local currencies in cross-border trade and payments, saying this should not just be seen as a way to reduce reliance on international currencies. “Settlement of cross border transactions in local currencies results in lower transaction costs, fewer currency mismatches, better settlement efficiency, and the ability to trade where correspondent banking is costly or constrained,” he said. Success is dependent on banks’ ability to ensure commercial viability, emphasise trade settlement in local currencies, offer market-determined rates, and strengthen confidence in the settlement ecosystem, Jain added.

Need to leverage technology

While forex markets have made considerable progress in the areas mentioned above, there is “some distance to travel” when it comes to leveraging technology across the customer chain, Jain said. The aim over the next decade should be to make foreign exchange transactions digital from origination to reporting, he added.

He noted that artificial intelligence and machine learning can streamline document classification, anomaly detection, reporting, and product standardisation. Banks adopting these digital workflows early, he added, will define market standards rather than follow them.

Jain noted that skewed participation continues to hold back India’s forex market. While public sector banks (PSBs) have deep ties with small businesses outside major metros, their involvement in forex derivatives remains disproportionately low relative to their balance sheet size. Consequently, large corporations dominate the market, leaving smaller clients—who need currency risk hedging the most—on the sidelines. To address this, he called for expanding the market-maker base, boosting PSB participation, and promoting electronic platforms.

Also Read | RBI governor flagged banks’ margin stress, and banks see it continuing

He also warned against illegal online forex platforms, noting that the RBI continues to receive fraud and cheating complaints about these unregulated entities.

“India’s foreign exchange market will be ready for the next decade when it is deep enough to absorb global shocks, flexible enough to support new forms of trade and investment, disciplined enough to preserve orderly conditions, and fair enough to serve the smallest user with the same humility as the largest corporate client,” Jain said.