Informist, Tuesday, Mar 12, 2024
--Dealers: RBI officials favour boosting NDF volume at GIFT City
--CONTEXT: RBI officials met FX traders at FEDAI Conference Sat-Sun
--Dealers: RBI hinted at easing norms to boost GIFT City NDF trade
--Dealers: RBI keen on boosting FX reserves given bond index inclusion
By Pratiksha
NEW DELHI - The Foreign Exchange Dealers Association of India held its annual conference in London over the weekend, where prominent players from the currency market exchanged notes with each other and with Reserve Bank of India officials, who also attended the event. Dealers who were present at the conference said that a key takeaway was RBI officials batting for rupee non-deliverable forwards to trade more actively at the International Financial Services Centre in Gujarat and shifting volumes away from offshore markets.
RBI Deputy Governor T. Rabi Sankar, who oversees the foreign exchange department at the central bank, was a participant in one of the panel discussions held at the conference, dealers said.
"They (RBI officials) said they want to see all rupee volumes shift to onshore and GIFT city could be the mechanism by which that can happen," a dealer at a foreign bank said. "Looks like the NDF market at GIFT City may see prominence in the coming days."
In 2020, the RBI allowed banks with International Financial Services Centre banking units to foray into the offshore non-deliverable forward or the NDF rupee derivative market. Non-deliverable forward markets are offshore markets that enable trading of the non-convertible currency outside the influence of the domestic authorities. These contracts are settled in a convertible currency, usually US dollars, as the non-convertible currency cannot be delivered offshore.
RBI officials indicated that the central bank might tweak some norms regarding trading at the IFSC-Gujarat International Finance Tec-City and may also ease some foreign exchange management rules to make it a more attractive trading venue for rupee NDF, currency dealers told Informist. The RBI officials also advised banks to actively opt for the rupee NDF market at GIFT City for trading, dealers said.
"There may be some relaxations in the rules for GIFT City trading," said a dealer with a private bank. "They want banks who are still going the traditional way to explore NDF trades via GIFT City."
On Feb 29, quoting finance ministry officials, Informist had reported that the RBI was keen to allow all banks to trade rupee NDF at Gift City, whether or not they had an international banking unit there. The move was aimed at increasing participation at the financial centre, ministry officials had said.
The RBI wants to shift more of the NDF trade volumes closer to home in order to have more visibility on market activity that tends to have a direct impact on the domestic exchange rate, the finance ministry officials said.
STOCKING RESERVES
According to dealers, the RBI officials also said that the central bank was looking to beef up its foreign exchange reserves because of India's inclusion in global bond indices. Although the entry into global indices will initially lead to greater foreign investment in Indian bonds, the central bank wants to prepare for potential episodes of foreign fund outflows as these are likely to become heavier because of increased foreign ownership of Indian debt, dealers said.
"They (RBI officials) said that the need for reserves building has increased as they have to prepare for outflows as well," the dealer with a private bank said. "They hinted at an appreciation bias in the rupee going ahead, but they may continue to buy the dips (in dollar/rupee)."
JP Morgan will include Indian gilts on its Government Bond Index – Emerging Markets starting Jun 28, while Bloomberg has proposed to add Indian bonds on its Emerging Markets Local Currency Index starting September. The total passive inflow is expected to top $30 bln in 2024-25.
Last week, RBI Governor Shaktikanta Das had said the central bank will be able to handle the kind of inflows or outflows emanating from the index inclusion, owing to the strong foreign exchange reserves. India's foreign exchange reserves rose to a two-year high of $625.63 bln in the week ended Mar 1.
Another topic of discussion at the conference was the lack of volatility in the dollar/rupee exchange rate over the last few months. RBI officials commented that a stable currency attracts robust foreign portfolio inflows. The central bank was, however, concerned that the lack of movement in the exchange rate has dissuaded market participants from hedging their currency risk, dealers said.
"Everybody agreed that a stable currency will attract good foreign inflows," another dealer at a private bank said. However, they asked traders to continue hedging their foreign exposures in order to prepare for exigencies, the dealer said.
Since last year, volatility in the Indian rupee has dropped to historical lows due to the RBI's excessive two-sided intervention in the domestic spot market, prompting importers and exporters to hedge less.
After trading in a tight range of 82.80-83.30 for most of the latter half of 2023, the rupee has appreciated over 0.5% so far this calendar year. Today, the Indian currency settled at 82.7675 a dollar. End
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