RBI’s Move to Curb Foreign Dominance on Rupee Derivatives

The Reserve Bank of India (RBI) allowed settlement and trading derivatives of rupee (in foreign exchange) in the Indian currency from some foreign centres. The RBI’s decision to curb the influence of foreign centres will impact trade hubs such as Singapore and Dubai as they see massive amounts of derivatives of rupee traded. 

The move will indirectly affect non-deliverable forwards (NDFs) and over-the-counter (OTC) rupee market derivatives in the US and London. RBI accepted the recommendations made by the offshore rupee derivatives committee headed by Dr Usha Thorat in its bi-monthly policy review meeting on last Friday. 

RBI appointed the offshore rupee derivates committee had suggested a slew of measures to control the ever-rising influence of offshore rupee markets. It included extending the trading hours, allowing the currency derivative transactions up to a threshold with no underlying exposures.

The committee further recommended allowing participants to deal with their taxes and documentation at international centres. The overhot offshore rupee market adversely impacted the Indian national currency back in the year 2013. The main intention of the RBI is to develop a local market.

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RBI is looking to develop onshore rupee derivatives market at Gujarat International FinTech City (GIFT), an international financial services centre (IFSC). The RBI Governor said that the amount of trading in the onshore market is falling at the expense of offshore rupee markets. 

All the concerned market participants will be permitted for trading in the derivatives, so the market size would be comparable to that of Dubai Gold and Commodity Exchange (DGCX) and Singapore Exchange (SGX). As per a report from the Bank for International Settlements, the rupee market in London has surpassed that of Mumbai. 

The Central Bank of India is following the ever-increasing influence of the NDFs on local trading. The rupee had plummeted in 2013, and the Indian foreign exchange reserves fell to a record level. This was a case to be seen with almost every emerging country and it’s national currency. 

Now, RBI will allow the local banks to offer foreign currency prices to non-residents at free of cost. The domestic rupee derivatives market will not be similar to the currency derivatives available on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). 

In the case of local trades, you trade the US dollar (USD) against the Indian rupee (INR) and at the end of the trade. The amount of rupee that you would receive will be corresponding to the amount of US dollar you traded and the settlements would be made in the rupee.

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in.