RBI Opens NDF Trading to Onshore Banks

The Reserve Bank of India (RBI) has announced that as of June 1, onshore banks will able to transact in the Indian rupee (INR) NDF market.

The announcement was made as part of a raft of measures by the central bank as it strives to cope with the Covid-19 pandemic. Noting that the offshore INR NDF market has been “growing rapidly” in recent times, the RBI says that having examined all aspects of the issue in detail, a consensus has emerged in RBI that the time is apposite to remove segmentation between the onshore and offshore markets and improve efficiency of price discovery. “Accordingly, it has been decided, in consultation with the Government, to permit banks in India which operate International Financial Services Centre (IFSC) Banking Units (IBUs) to participate in the NDF market with effect from June 1, 2020,” the RBI statement says. “Banks may participate through their branches in India, their foreign branches or through their IBUs.”

At present, Indian banks are not permitted to participate in this market, although the RBI says the benefits of their participation in the NDF market have been “widely recognised”.

In 2019, according to the Bank for International Settlements’ Triennial Survey of FX Turnover, the INR was the 16th most traded currency in the world with $113 billion per day in turnover, up from $58 billion in 2016. While there was growth in the spot market, outright forwards, which includes NDFs in the BIS survey, rose from $23 billion in 2016 to $63 billion in 2019 – highlighting the surge in interest. Of that 2019 turnover, almost 65% is transacted outside India.

In recent weeks the RBI has been rumoured to be intervening to buy INR through an unnamed international institution, one source suggests one motive of the move to allow local banks into the market is for the RBI to use them to intervene instead.

Colin Lambert

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