The task force had indicated that the 2016 BIS survey (the next one will be released later in 2019) showed offshore trades in the rupee were more or less equal to deliverable onshore forwards; around $16 billion daily.
Indian banks are understood to have made suggestions to the task force on offshore rupee markets to allow their overseas units to cater to the rupee non-deliverable forward (NDF) market — a recommendation which the task force believes would be contradictory to the objectives of increasing business in onshore markets. The task force, chaired by former RBI deputy governor Usha Thorat, has recently submitted its recommendations to the RBI governor.
NDF markets enable trading of the non-convertible currency, like a rupee, outside the influence of the domestic authorities. For instance, trading in rupee NDF takes place in Singapore, Hong Kong, Dubai, London and New York markets. These contracts are settled in a convertible currency, usually US dollars.
Thorat told FE via a text message that Indian banks did represent to the task force that they should be permitted to trade in the NDF markets through their overseas offices. However, the task force seems to have its objections towards the same. “Allowing them to trade in NDFs would actually make them canvass business that would drive more liquidity to offshore markets. This would be contradictory to the objectives on increasing business in on shore markets,” Thorat said.
Manish Wadhawan, independent fixed income and forex expert, pointed out that this demand from Indian banks has been a long-standing one. “What happens is that the NDF market is not under any jurisdiction of an Indian regulator. It is like a hedge fund out of Switzerland can actually trade in rupee NDFs in Hong Kong. So, how will you control them? Nothing can be done. This is the reason why the central bank would not be wanting to allow Indian banks to participate in such markets where they could not be controlled. The bottomline is you cannot stop these markets. These are international markets and they will continue to function,” he said.
Indeed, this would be contrary to the objectives of the task force considering it was mandated to study the factors attributable to the growth of the offshore rupee market, its effects on the rupee exchange rate and onshore market liquidity, and formulate measures to redress the concerns. RBI governor Shaktikanta Das had also asserted in a recent speech that the aim is to make the onshore market more accessible and attract higher transaction volumes.
One of the main concerns has been the significant increase in the volume of rupee NDF trades in recent times. The task force in its report indicated that this sharp growth has raised concerns around the forces that are determining the value of the rupee and the ability of authorities to ensure currency stability.
The total daily average volume in NDF markets is about $200 billion as per Bank of International Settlements survey and India’s share was about 18.22%. The task force had indicated that the 2016 BIS survey (the next one will be released later in 2019) showed offshore trades in the rupee were more or less equal to deliverable onshore forwards; around $16 billion daily.
This increase in overseas volume will be a concern to the RBI considering that during the the last two stress episodes which include the taper tantrum in 2013 and the 2018 EM crisis, the NDF market had driven onshore exchange rate. “The study concludes that as NDF volumes have increased, they have begun to play an important role in both price discovery and driving volatility, particularly during heightened uncertainty period,” the task force had pointed out.
The recommendations included extending onshore market hours to improve access of overseas users, permitting Indian banks to freely offer prices to global clients around the clock, and enabling rupee derivatives (settled in foreign currency), to be traded in the International Financial Services Centers in India. “Foreign bank branches outside India can deal in the offshore market as they are not bound by the RBI’s regulations. On the other hand, overseas branches of Indian banks cannot deal in rupee derivatives in the offshore market. By introducing rupee derivatives in IFSC and permitting IBUs to deal in such derivatives, a more level-playing field can be provided to Indian banks to service non-residents,” it said.