Cen­tral bank moots ~ in­ter­ven­tion over­seas

RBI task force to ex­am­ine off­shore ru­pee mar­ket, sug­gest pol­icy steps


The Re­serve Bank of In­dia (RBI) is hav­ing sec­ond thoughts on its cur­rency in­ter­ven­tion strat­egy and may in­clude off­shore non-de­liv­er­able for­wards (NDF) mar­kets in its field of op­er­a­tions.

This is to tor­pedo the ac­tiv­i­ties of spec­u­la­tors drag­ging the ru­pee to record lows.

The cen­tral bank, in its sixth bi­monthly mone­tary pol­icy re­view, said it would form a task force to ex­am­ine the off­shore ru­pee mar­ket.

The RBI’s State­ment on De­vel­op­men­tal and Reg­u­la­tory Poli­cies, re­leased along­side the mone­tary pol­icy state­ment, said, “The task force will ex­am­ine the is­sues re­lat­ing to the off­shore ru­pee mar­kets in depth and rec­om­mend ap­pro­pri­ate pol­icy mea­sures that also fac­tor in the re­quire­ment of en­sur­ing the sta­bil­ity of the ex­ter­nal value of the ru­pee,” the state­ment said.

The terms of ref­er­ence for the task force will be given by the end of this month, and they may not in­clude any men­tion of off­shore in­ter­ven­tion. But sources say the cen­tral bank is think­ing of brac­ing it­self to cush­ion the on­slaught of for­eign spec­u­la­tors, against whom the RBI is help­less to act. The only way out is to take con­tra po­si­tions against spec­u­la­tors and let them cut their losses.

The RBI, in the same pol­icy state­ment, said the task force would ex­plore how to “im­prove res­i­dents’ ac­cess to de­riv­a­tives mar­kets to hedge their cur­rency risks”. And that con­tin­ues to be the RBI’s of­fi­cial stance, ba­si­cally to help off­shore hedgers hedge their cur­rency risks in In­dia.

How­ever, the task force will be free to rec­om­mend other in­ter­est­ing ideas though all of it may not be made pub­lic.

“The task force is for mak­ing pol­icy rec­om­men­da­tions; it may come out with a work­able propo­si­tion for the RBI to op­er­ate through NDFs also in a le­gal, if at all a cir­cuitous, way,” said a per­son fa­mil­iar with the mat­ter, but he main­tained it re­mained to be seen if the terms of ref­er­ence to the task force in­cluded such a move.

NDF dy­nam­ics

The NDF mar­ket op­er­ates in ma­jor fi­nan­cial cen­tres such as Dubai, London, and Sin­ga­pore. The daily av­er­age trade in ru­pees in such mar­kets is at least $60 bil­lion.

Even as the cen­tral bank can in­ter­vene in the do­mes­tic mar­ket and sta­bilise the ex­change rate here, it has no con­trol over the NDF mar­ket, which, most of­ten than not, de­ter­mines how the ru­pee will open the next day in the on­shore mar­ket.

NDF is used by for­eign port­fo­lio in­vestors tak­ing po­si­tions in In­dia, which the cen­tral bank is try­ing to bring on­shore. But a size­able chunk of the NDF mar­ket is driven by spec­u­la­tors, which has al­ways been a con­cern of the reg­u­la­tor.

“It will be a bet­ter world for us if there is no NDF mar­ket, but we can­not wish it away,” D Sub­barao, then RBI gover­nor, said in July 2013.

The NDF mar­ket pulled down the ru­pee rapidly to record lows in 2013, and again in Septem­berOc­to­ber last year, it wreaked havoc on ex­change rates and on Oc­to­ber 11, it reached its life­time low closing of 74.39 a dol­lar.

“Oil prices were re­spon­si­ble of course, but frankly, much of it was also spec­u­la­tion,” said Ab­hishek Goenka, man­ag­ing di­rec­tor of IFA Global, a cur­rency con­sul­tant.

In 2013, the RBI and the govern­ment were mo­bil­is­ing forces with other emerg­ing mar­kets for a joint op­er­a­tion in the off­shore mar­kets. The govern­ment reached out to other mem­bers of BRICS (Brazil, Rus­sia, In­dia, China, and South Africa) for such an ac­tion.

Brazil’s then fi­nance min­is­ter, Guido Man­tega, had said the BRICS na­tions were con­tem­plat­ing coordinated ac­tions to cre­ate a joint bank and joint re­serve fund for off­shore in­ter­ven­tion.

This was af­ter emerg­ing mar­ket cur­ren­cies wit­nessed a rout on US ta­per tantrum con­cerns. Be­tween May and Au­gust 2013, the In­dian ru­pee fell 20 per cent to its then life­time low of 68.87 a dol­lar in Au­gust. In cal­en­dar 2018, ru­pee fell 9.60 per cent.

Brazil said no, as it moved to de­velop a do­mes­tic NDF mar­ket (DNDF). The RBI task force will ex­plore de­vel­op­ing such DNDFs for In­dia as well, while keep­ing all op­tions open, sources say.

Mer­its and de­mer­its

There is no hin­drance for the RBI to en­ter the off­shore NDF mar­ket anony­mously, but it has to do so through an agent. This agent, how­ever, will have to in­form the lo­cal reg­u­la­tor about the client.

While client con­fi­den­tial­ity will be main­tained from other mar­ket par­tic­i­pants, the lo­cal reg­u­la­tor will have knowl­edge of RBI in­ter­ven­tion.

Since it is a for­wards mar­ket, the cen­tral bank will not have to shell out big money. The for­wards in­ter­est for three months, be­ing at 3 per cent, means the RBI can ef­fec­tively sell just $300 mil­lion to sup­port $10 bil­lion worth of trades.

But the cen­tral bank can eas­ily scale up such in­ter­ven­tions to a few bil­lion dol­lars through for­wards and that can eas­ily de­ter any spec­u­la­tion. “If the mar­ket gets to know that the RBI is there to sup­port the ru­pee in the off­shore mar­ket, spec­u­la­tors won’t dare take long po­si­tions,” said Goenka.

How­ever, this could also be coun­ter­pro­duc­tive at a time when the RBI is try­ing to de­velop the do­mes­tic for­wards mar­ket.

“If RBI it­self builds up vol­ume in the off­shore­mar­ket, then why should a for­eigner hedge on­shore? He would rather ac­cess the NDF mar­ket to hedge,” said Samir Lodha, man­ag­ing di­rec­tor of trea­sury man­age­ment firm Quan­tArt Mar­ket So­lu­tion.


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