A normal offshore market needs the currency to be deliverable: someone outside the country has to be able to hold and hand over the actual money. Where notes may not cross the border beyond a set amount and capital movements are governed by an annual limit, that is not possible. The gap is filled by non-deliverable contracts, which settle the difference in a convertible currency instead of delivering the restricted one.
Under the Foreign Exchange Management regulations, a person resident in India may carry no more than Rs. 25,000 in Indian banknotes out of the country. That rule, and the separate limit on moving capital, is why there is no ordinary market in the rupee outside India - and why the instrument that fills the gap never delivers the currency at all.
Key Takeaways
- An ordinary forward market requires delivery of the actual currency.
- Where notes may not cross the border in quantity, delivery outside the country is not possible.
- Under Indian regulations a resident may take out no more than Rs. 25,000 in notes.
- Capital movements are governed separately, through an annual remittance limit.
- The gap is filled by non-deliverable contracts, which settle a difference rather than exchange the currency.
What a normal offshore market requires
An offshore market in a currency is just people outside the issuing country buying and selling it among themselves. For that to work, at least one of them has to be able to end up holding the actual money.
That sounds trivial until you consider what holding it means. It means an account denominated in that currency, at an institution the holder can reach, which can receive and pay out real balances. It means the money can arrive and leave. Where those things are true, a market forms without anyone designing it.
Where they are not, no market forms, however much demand there is.
What prevents it
Two distinct restrictions do the work, and they are frequently confused.
The first is on the physical notes. Under the Foreign Exchange Management regulations governing the export and import of currency, a person resident in India may take out no more than Rs. 25,000 in notes, other than to Nepal and Bhutan, and a visitor who is not a citizen of Pakistan or Bangladesh may bring in or take out no more than the same amount. Nepal and Bhutan sit under a separate rule with its own denomination limits.
The second is on capital. The Reserve Bank of India's Liberalised Remittance Scheme allows a resident individual, including minors, to remit up to USD 2,50,000 per financial year abroad, for a defined list of purposes, with some uses barred outright: lottery tickets, trading in foreign exchange, and margin calls to overseas exchanges among them.
Notice that neither restriction stops ordinary commerce. Trade payments are made, family transfers arrive, and travellers are served. What they prevent is the accumulation of freely transferable balances outside the country in the quantities a market needs, and that is what an offshore market is made of.
The instrument that fills the gap
Demand for hedging does not disappear because the market cannot form. An exporter with revenue in a restricted currency still has an exposure, and so does a company with a subsidiary there.
The answer is a contract that fixes a rate without ever exchanging the currency. Two parties agree a rate for a future date. On that date they compare the agreed rate with an agreed reference rate, work out the difference on the notional amount, and settle only that difference, in a convertible currency, usually US dollars. The restricted currency is referenced throughout and delivered at no point.
That is what non-deliverable means, and it is an elegant piece of financial engineering: it separates the economic exposure, which is what the hedger cares about, from the physical delivery, which is what the restriction blocks.
Why authorities take an interest
A non-deliverable market produces a price for a currency, formed outside the jurisdiction that issues it, by participants that jurisdiction does not license.
That price is not necessarily wrong, and the market is not illicit; it is transacted openly between regulated institutions in major financial centres. But it does mean there can be two references for the same currency, one onshore and one off, and that they can diverge under stress precisely when clarity is most wanted.
The policy response has been to bring the activity home rather than to prohibit it, which is the same instinct behind opening a closed onshore market. India's approach has been to bring it onshore. The Reserve Bank's circular of 2023 made banks holding an Authorised Dealer Category-I licence and operating IFSC Banking Units eligible to offer non-deliverable derivative contracts involving the rupee to resident non-retail users, cash-settled in rupees, with the stated aim of developing the onshore market for these contracts and giving residents the flexibility to design their hedging efficiently. That is a considered choice: if the exposure exists and the hedging will happen somewhere, there is an argument for it happening where it can be seen.
What this means for an ordinary conversion
Almost nothing directly, and saying so plainly matters, because the machinery above is wholesale.
Somebody sending money to family, paying tuition or settling an invoice is not touching any of it. Their transfer is an ordinary payment, arranged in the currency of the receiving country and converted at that end.
Where it does show up is in availability. A currency of this kind is generally not sold as travel cash before departure, because the notes cannot lawfully be carried in quantity. It is obtained on arrival, and money crossing the corridor arrives as a transfer into an account rather than as cash in a case. What builds such a corridor is settlement rather than trade.
Where to look next
The AUD to INR page carries the live reference rate and a short block on what kind of money the rupee is, including why its figures are written the way they are. For the mechanics of a transfer, how international money transfers work covers the process end to end.
Sources
- Foreign Exchange Management (Export and import of currency) Regulations, 2015 - the Rs. 25,000 limits for residents and for visiting non-residents, the exclusion of Pakistani and Bangladeshi citizens, and the separate Nepal and Bhutan provisions
- Reserve Bank of India, FAQs on the Liberalised Remittance Scheme - the USD 2,50,000 annual limit, eligibility including minors, the April to March financial year, and the prohibited purposes including foreign exchange trading and margin calls to overseas exchanges
- Reserve Bank of India, A. P. (DIR Series) Circular No. 05, Risk Management and Inter-Bank Dealings - Non-deliverable derivative contracts (NDDCs), 2023 - the eligibility of banks holding an Authorised Dealer Category-I licence and operating IBUs to offer NDDCs involving the rupee to resident non-retail users, the requirement that such transactions be cash-settled in rupees, and the stated aim of developing the onshore market and letting residents design their hedging efficiently
General information about currency market structure and hedging instruments. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
What is a non-deliverable forward?
A contract that fixes an exchange rate for a future date but never exchanges the restricted currency. On the settlement date the two parties compare the agreed rate with a reference rate and settle the difference in a convertible currency, usually US dollars. Nobody ever has to hold or deliver the currency the contract is about.
Why would a currency have no offshore market?
Because a normal forward market requires delivery, and delivery requires someone outside the country to be able to hold and hand over the actual currency. Where the notes may not cross the border in quantity and capital movements are governed, that is not possible, so the ordinary market cannot form.
How much Indian currency can you take out of India?
Under the Foreign Exchange Management regulations, a person resident in India may take out no more than Rs. 25,000 in notes, other than to Nepal and Bhutan. A visitor who is not a citizen of Pakistan or Bangladesh may bring in or take out no more than the same amount.
What limits apply to Indian residents sending money abroad?
The Liberalised Remittance Scheme, under which the Reserve Bank of India allows a resident individual, minors included, to remit up to USD 2,50,000 per financial year for a defined list of purposes. Some uses are barred outright, including lottery tickets, trading in foreign exchange, and margin calls to overseas exchanges.
Is a non-deliverable market a loophole?
Not in itself. It is a response to a genuine hedging need that the restrictions leave unmet, and it is transacted openly between regulated institutions. It does mean a price for the currency exists outside the authorities' reach, which is why regulators take an interest in it.