RBI allows rupee derivatives trade in IFSCS
RBI allows rupee derivatives trade in IFSCS
The RBI on Friday allowed Indian banks to freely offer foreign exchange
prices to non-residents at all times and said trading in rupee derivatives would be allowed and settled in foreign currencies in International Financial Services Centres (IFSCS). The Gujarat International Finance Tec- City is one such IFSC planned for India.
The Reserve Bank of India (RBI) on Friday allowed banks to freely offer foreign exchange prices to non-resident Indians at all times, and said trading on rupee derivatives will be allowed and settled in foreign currencies in International Financial Services Centres (IFSCS).
The Gujarat International Finance Tec- City (GIFT) is one such IFSC planned for India. These were two major recommendations by the Usha Thorat committee on the offshore rupee markets, which was aimed at bringing these markets to India.
The other recommendations are getting examined by the RBI, the policy statement said.
The issue here is that the non-deliverable forwards (NDF) markets have garnered volumes much above the domestic market. However, the RBI has no control over the offshore markets.
According to Bank of International Settlements (BIS), NDFS in six currencies — Korean won, Indian rupee, Chinese renminbi, Brazilian real, Taiwanese dollar and Russian ruble — account for two-thirds of the trade in the NDF globally. The total daily average volume in NDF markets was about $200 billion according to a BIS survey, where the share of India was about 18.22 per cent.
In 2016, offshore trades in the rupee were “more or less equal to deliverable onshore forwards,” the BIS data had found. The 2019 data is yet to be available. A 2018 Bank of England survey reported $23 billion in offshore rupee trades, while RBI sources estimate deliverable daily onshore forwards at $21 billion, which shows that offshore rupee derivatives markets are now deeper than the onshore market.
Even as the IFSC is located in India, for all practical purposes, it is an offshore market such as those in Singapore, Hong Kong, London, Dubai and New York. But bringing volume to Indian shores would mean better information dissemination. In the offshore NDF market, no physical delivery of rupee takes place, but its volume far outstrips those in the domestic interbank market.
“The sharp growth in the offshore trading volumes in the rupee NDF market in recent years likely even beyond the volumes in the onshore markets have raised concerns around the forces that are determining the value of the rupee and the ability of authorities to ensure currency stability,” the task force report had said in August.
The RBI said directions for implementing the two recommendations of the Usha Thorat committee will be issued in consultation with the central government and other regulators.
The Thorat committee had recommended free quoting of prices because foreign portfolio investors (FPIS) as well as global corporate entities were unable to access multiple competitive quotes in the onshore market, and effectively, they were limited to using the prices of their custodian banks. This is also because the custodian banks were responsible for tracking of outstanding hedges vis-à-vis portfolio size.
This “friction” issue can be addressed by shifting the monitoring to a centralised agency which can use a technology solution to track exposures as well as outstanding hedges.