RBI’s Move On Onshore Rupee Derivatives To Curb Foreign Dominance On INR Trades

Mumbai, October 5: In its attempt to give a good competition, India’s central Bank the Reserve Bank of India (RBI) allowed trading and settlement (in foreign exchange) of Rupee derivatives on the Indian soil in certain specific centres. This move from the RBI will go in long way to curb the influence of foreign centres like Dubai and Singapore, which are witnessing significant amount of Rupee derivatives trade. It will also indirectly impact non-deliverable forward (NDF), the opaque and non-transparent, over the counter (OTC) Rupee derivatives market active in London and in the US. 

The Reserve bank of India (RBI) accepted the recommendations of the Dr Usha Thorat committee on offshore Rupee derivatives products as part of its bi-monthly monetary policy committee (MPC) review meeting on Friday. The RBI appointed committee, headed by former Deputy Governor Usha Thorat, had suggested had suggested a host of measures to curb the rising influence of the offshore rupee markets including longer trading hours, permission to undertake currency derivative transactions upto a limit without underlying exposure and aligning tax and documents with international centres. The overactive and overhot offshore Rupee derivatives market had its adverse impact on Indian currency in 2013.

The market that RBI intends to develop locally will come up in the Gujarat International FinTech (GIFT) City, which has been accorded the status of International Financial Service Centre (IFSC). All the designated players will be allowed to trade in the Rupee derivatives and they will be made available the level playing field that is available to the players in Dubai Gold & Commodity Exchange (DGCX) and Singapore Exchange (SGX).

“The quantum of the Trading in the onshore market has been shrinking at the expense of offshore rupee market”, RBI Governor Shaktikanta Das told reporters. According to sources, for instance, London has surpassed India’s financial capital Mumbai to become the top center for trading rupee, according to the report of Bank for International Settlements (BIS) released last September.

The RBI’s plan also follows the increasing influence of the non-deliverable forwards market on local trading. The rupee was held hostage in 2013, the year of the taper tantrum, by offshore speculators when India’s forex reserves dwindled. The currency tumbled along with its emerging-market peers.

For instance, average daily trading volumes for rupee in the UK soared to $46.8 billion in April, a more than fivefold jump from $8.8 billion in 2016, according to a BIS report released last month. That exceeded the $34.5 billion recorded in India.

The RBI will also allow local banks to freely offer foreign currency prices to non-residents, RBI said.

V Balasubramaniam, MD & CEO, India INX said, "We being the leading exchange in GIFT IFSC, welcomes this move and looks forward to launch the Rupee-Dollar Futures and Options trading once the approvals from Sebi and RBI are taken. This is a welcome move to Onshore the offshore rupee-dollar markets which have been migrated to other international financial centres. We expect a lot of participants to now be attracted to the IFSC, and similar to other asset classes like equity index and gold, we look forward to build significant liquidity."

The onshore Rupee derivatives market will be different from the currency derivatives that is already available on the currency segment of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Explaining this in detail, the sources said, locally you trade US Dollar (USD) with the Indian Rupee (INR). That is, at the end of the trade you receive INR against the number of SD you traded. The settlement is in INR, while in case of offshore derivatives, trades in INR will be settled in USD. This will attract more foreigners and non-resident Indians (NRIs).

The flight of Indian market to overseas centres is so huge that the open interest in Dubai averages to 4-5 billion USD while that of SGX stands at 2-2.5 billion USD, which is two to five times more than the trades executed in India.