Govt sources say RBI keen to open GIFT's NDF mkt to bks sans IFSC unit
Informist, Thursday, Feb 29, 2024
--Govt sources: RBI keen to open GIFT's NDF mkt to bks sans IFSC unit
--Govt sources: RBI wants to bring NDF mkt to India from overseas
By Krity Ambey and Sagar Sen
NEW DELHI – The Reserve Bank of India is keen on allowing all banks to trade rupee non-deliverable forwards at Gandhinagar-based International Financial Services Centre, irrespective of whether they have an international banking unit at Gujarat International Finance Tec-City, or GIFT City, two finance ministry officials involved in the matter said.
Currently, out of 137 scheduled commercial banks in India, only 25 banks with international units at GIFT city can trade in rupee non-deliverable foreign exchange derivative contracts at the international financial centre of Gujarat.
"RBI is envisaging permitting every bank, whether it has an IBU (international banking unit in GIFT-IFSC) or not," one of the two officials said. "If you look at the volumes of NDF in GIFT, you will never be satisfied until and unless those banks in India are allowed there without an IBU."
Non-deliverable forward markets are popular avenues for trading currencies which are not fully capital account convertible. In NDF markets, currency forward trades are settled in a convertible currency. NDF markets help foreign investors hedge their currency risk as well as place speculative bets, while avoiding stringent regulatory restrictions, cumbersome documentation and know-your-customer requirements, and trading in different time zones. Globally, the bulk of NDF trading takes place in international financial centres such as London, Singapore and New York. In fact, the trade volume for Indian rupee in the NDF market far surpasses that in the onshore market.
GIFT city qualifies as a venue for trading rupee NDF as it is a deemed foreign jurisdiction within Indian territory. Operations of entities present in GIFT city, including the international business units of domestic banks, are not subject to Indian regulatory requirements, instead they come under the regulatory ambit of the International Financial Services Centre Authority.
In April 2023, the RBI had allowed banks in the International Financial Services Centre to offer non-deliverable foreign exchange derivatives contracts to resident users in the onshore market. However, even after 10 months from the announcement, the NDF trading volume at GIFT city remains modest as currency traders continue to prefer offshore markets which are far more liquid.
The RBI wants to shift more of the NDF trade volumes closer to home in order to have more visibility on market activity, which tends to have a direct impact on the domestic exchange rate, the finance ministry officials said.
"The RBI is bent on bringing that market (of rupee NDF contract) from overseas to India. Because there is lot of speculation in Indian rupee. So to manage that, take things into their hand, RBI wants this," said the official quoted above.
The decision to allow banks present in GIFT city to trade rupee non-deliverable forwards has itself improved the RBI's access to information regarding NDF activity, the second official said. This helps the central bank better plan its intervention to manage exchange rate volatility. "Objective is to have some control over rupee," the first official said.
Last week, Informist had reported that the RBI was considering setting up a domestic clearing house in GIFT city that may begin its operations with the settlement of rupee non-deliverable forwards.
The RBI's efforts to step up monitoring of NDF trades come at a time when India's external exposure is about to increase substantially because of Indian gilts' inclusion in global bond indices.
In September, JP Morgan announced inclusion of Indian gilts in its Global Bond Index – Emerging Markets suite over a 10-month period starting Jun 28. The government expects foreign inflow worth $23 bln after the inclusion, Finance Minister Nirmala Sitharaman had said.
Although India's entry in bond indices is immediately positive for the rupee, the increased foreign ownership of Indian bonds could set up the currency for higher volatility and speculation in adverse times, currency dealers have said. End
