The open interest on USD/INR currency futures on the National Stock Exchange (NSE) declined more than 40% to $4.6 billion from this year's peak of near-$8 billion in January.
In October 2022, when the rupee dropped to a record low, the open interest had climbed to $8.8 billion.
The Indian rupee was at 82.80 against the dollar as of 1:30 p.m. IST on Wednesday.
Since February, the rupee held in a less-than-2% range between 81.50-83.00, due to active intervention from the Reserve Bank of India (RBI).
The central bank was likely intervening when USD/INR moved near either end of the range, traders said.
The lack of conviction about the currency's direction amid the muted volatility dampened volumes and speculative activity.
"The size of the position is mainly a function of the conviction on the outlook. And that is missing currently," said Nitin Agarwal, India head of trading at ANZ.
Average daily volumes on the NSE's currency derivatives segment were down more than 30% this month, compared to January levels. Volumes on the NSE represent a large chunk of trading in rupee derivatives.
"With the USD/INR contained to a narrow range, people are not taking large short or long bets. The proprietary activity of banks on the currency side has reduced," said Ashutosh Tikekar, head of global markets at BNP Paribas India.
Instead, banks are focused on managing clients' forex flows, he added.
Volumes between banks in the over-the-counter segment also witnessed a sizeable decline, mirroring the NSE.
The average daily volume so far this month is at $4.5 billion on the interbank order matching system, compared with $6.9 billion in January.
"The shrinking range means stop-losses and take-profits are now smaller, both on an intraday and a larger time frame," a senior proprietary trader at a private sector bank said.
(Reporting by Nimesh Vora and Jaspreet Kalra; Editing by Janane Venkatraman)
By Nimesh Vora
