The Reserve Bank of India's move to allow Indian companies to issue rupee bonds overseas has the potential to give an unintended boost to the...
The Reserve Bank of India’s move to allow Indian companies to issue rupee bonds overseas has the potential to give an unintended boost to the opaque offshore rupee derivatives market, which has been responsible for currency volatility in the onshore market in the past.
Central bank watchers and bankers believe that since rupee bonds would transfer the exchange-rate risk over to the investor from the Indian company, the dollar/rupee non-deliverable forward market (NDF) volume would get a fillip.
“The decision to permit Indian corporates to issue offshore INR bonds has the unintended consequence of widening the user base in the offshore INR NDF markets. Given that investors would not have an onshore underlying, should they wish to hedge, they would not come to the onshore market and hedge the currency risk,” said Hitendra Dave, head of global markets, HSBC.
Foreign institutional investors prefer to hedge their rupee exposures in the offshore NDF market given the liquidity and the lack of regulation.
Apart from giving unbridled access, the NDF market also gives a hedging cost benefit, bankers said. “Investors have the choice of hedging onshore or offshore. It depends on where the cost is lower. FIIs can choose to leave onshore positions unhedged,” said Ashish Vaidya, head of trading and asset liability management of DBS Bank.
The three-month offshore NDF dollar/rupee rate was around 6.35%, while the onshore three-month forward rate was far higher at 8% on Wednesday. The NDF rate has been cheaper than the onshore forward rate at most times.
The size of the NDF market is unknown, but currency market participants put the daily average volume to around $3-4 billion, or around 60% of the onshore market’s.
The NDF market was responsible for exacerbating the rupee’s fall to an all-time low in August 2013. During episodes of rupee depreciation, the NDF rates have influenced the onshore dollar/rupee rates in a big way, infusing volatility here.
In fact, an internal study of the RBI itself pointed out the influence of the NDF rates on onshore rates increases during periods of depreciation.
Currency dealers said that given that foreign investors would not have an onshore underlying asset, they do not need to hedge their currency risk in the onshore market. “Even with underlying exposure, many FIIs hedge offshore mainly because the market does not have restrictions on cancellation and rebooking like the onshore forward market,” said a senior currency trader at a private bank.