In another move to curb speculation in the Indian rupee, Foreign institutional investors (FIIs) were banned from  hedging participatory notes unless the holder of the notes seek such a move.

Registered FIIs issue Participatory notes, or PNs to overseas investors who wish to invest in the Indian stock markets without registering themselves with the market regulator.

This move is expected to restrict arbitrage trade being done by FIIs in the non-deliverable forwards (NDF) market.

RBI realised that several FIIs are using stocks bought in the Indian market to enter into forward deals in India. While such transactions may come across as plain hedging, these deals are in reality arbitrage trades, with FIIs buying forwards in India and selling forwards in NDF markets to profit from the difference.

Typically, when the rupee is under pressure, the non-deliverable forwards (NDF) have a higher premium than onshore forwards. Thus an FII buying a month forward in India may be doing a simultaneous trade in NDF to lock in the difference.

The move may restrict the ability of foreign funds to play in the offshore NDF market in a bid to ease the pressure on the rupee.