The Reserve Bank of India has decided to permit banks in India, which operate International Financial Services Centre Banking Units (IBUs), to participate in the non-deliverable forward (NDF) market with effect from June 1, 2020. The RBI took the decision despite the recommendation by a task force set up by it against allowing banks in the NDF market.
“Banks may participate through their branches in India, their foreign branches or through their IBUs,” the central bank said. NDFs are foreign exchange derivative instruments on non-convertible or restricted currencies traded over the counter (OTC). mainly at offshore centres outside the direct jurisdiction of the respective national authorities.
The Task Force on Offshore Rupee Markets, set up by the RBI, had proposed that Indian banks should not be permitted to deal in the offshore rupee derivative market — or the NDF market — for the present as the downside of permitting them to deal in this market outweighs the advantages.
The NDF market has been growing rapidly in recent times. Currently, Indian banks are not permitted to participate in it, although the benefits of their participation in the NDF market have been widely recognised. “All aspects of the issue have been examined in detail and a consensus has emerged in the RBI that the time is apposite to remove segmentation between the onshore and offshore markets and improve efficiency of price discovery,” the RBI said.
SBI Chairman Rajnish Kumar said the decision is a positive step in broadening the market participants and better rate discovery.
However, the panel, in its report in August last, had recommended extension of onshore market hours to improve access of overseas users and permit Indian banks to freely offer prices to global clients around the clock. “Onshore rupee derivatives market is currently more deep and liquid as compared to the offshore rupee market and participation of Indian banks in the offshore market might, over time, take away this advantage,” the panel headed by former RBI deputy governor Usha Thorat said. The sharp growth in offshore trading volumes in the rupee NDF market in recent years, even beyond the volumes in onshore markets, had raised concerns around the forces that are determining the value of the rupee and the ability of authorities to ensure currency stability.
The panel, which submitted its report on July 30, 2019 to the RBI, examined the causes of the underlying the growth in the overseas NDF markets and identification of measures to reverse the trend. The task force had proposed rupee derivatives (settled in foreign currency) to be traded in the International Financial Services Centers (IFSC) in India, to begin with on exchanges in the IFSC.