In an NDF, the principal amounts of the two currencies are not delivered. The parties pay or receive only the difference between the rate published on the valuation date (the fixing) and the agreed rate, multiplied by the notional amount. Because no currency is delivered, an NDF can hedge currency risk even for currencies whose delivery abroad is tightly restricted.
Consider a hypothetical example in which the notional amount is USD 10 million and the contract rate is 84.00 rupees per dollar. The party selling rupees receives USD 400,000 if the fixing is 87.50 rupees and pays USD 500,000 if it is 80.00 rupees. The settlement method differs from an FX forward, which delivers the principal.