‘High offshore trading in Rupee derivatives worrying’
15 Dec 2013 10:35 PM GMT
Expressing concern over the large volume of rupee market being played out in overseas market leading to high volatility, Finance Minister P Chidambaram on Saturday asked market players to suggest ways to bring trading back to the country and stressed on the need for more financial reforms to boost the local market. ‘One important concern is the loss of onshore market of the rupee... the volume of trading of rupee in the non-deliverable forwards (NDF) market is said to be a multiple of the volumes in the official domestic exchanges,’ he said here.
Chidambaram asked market participants to come up with solutions. ‘At the government, we don’t have a solution to this (bring back the market volume). The solution has to come from the market participants,’ Chidambaram said at a panel discussion after his keynote address. ‘The goal is to bring those markets back to the country, not to the exclusion of the world but at least the market here can compete with the market outside,’ he added.
NDF is an offshore forex derivative market, traded over-the-counter and operated in currencies that are freely convertible unlike the rupee. This market enables hedging of exchange rate risks, irrespective of any restrictions arising in the currency of origin.
The NDF market is not controlled by any authorities here, and is dominated by foreign players as the Reserve Bank of India (RBI) does not allow domestic banks to participate in this market. Also, the sheer volume in this market leads to frequent volatility in the domestic market.
The RBI has also been keenly watching the NDF market and for the first time, it has openly come out a statement in its annual report released in August. Quoting an internal report, RBI had said the offshore market is leading to rupee movement and is exerting more pressure on onshore currency market, especially when rupee is under stress.
Generally, NDF trading is considered speculative and is perceived as one of the reasons for the steep rupee fall in recent past, which had touched the lowest level of 68.85 against the dollar on August 28. The rupee had plunged 27 per cent between mid-May and end August following the US Fed’s tapering talks on May 17. The rupee slipped 29 paise to end at 62.12 against the dollar on Friday, the lowest level since December 3.
‘During the period of (rupee) depreciation, shocks originating in the NDF market may carry more information, which get reflected in the on-shore segments of the market through mean and volatility spillovers. During the period of the rupee appreciation, the NDF market and the rupee spot market exhibit a bi-directional relationship,’ the RBI had said quoting its internal study.
Chidambaram asked market participants to come up with solutions. ‘At the government, we don’t have a solution to this (bring back the market volume). The solution has to come from the market participants,’ Chidambaram said at a panel discussion after his keynote address. ‘The goal is to bring those markets back to the country, not to the exclusion of the world but at least the market here can compete with the market outside,’ he added.
NDF is an offshore forex derivative market, traded over-the-counter and operated in currencies that are freely convertible unlike the rupee. This market enables hedging of exchange rate risks, irrespective of any restrictions arising in the currency of origin.
The NDF market is not controlled by any authorities here, and is dominated by foreign players as the Reserve Bank of India (RBI) does not allow domestic banks to participate in this market. Also, the sheer volume in this market leads to frequent volatility in the domestic market.
The RBI has also been keenly watching the NDF market and for the first time, it has openly come out a statement in its annual report released in August. Quoting an internal report, RBI had said the offshore market is leading to rupee movement and is exerting more pressure on onshore currency market, especially when rupee is under stress.
Generally, NDF trading is considered speculative and is perceived as one of the reasons for the steep rupee fall in recent past, which had touched the lowest level of 68.85 against the dollar on August 28. The rupee had plunged 27 per cent between mid-May and end August following the US Fed’s tapering talks on May 17. The rupee slipped 29 paise to end at 62.12 against the dollar on Friday, the lowest level since December 3.
‘During the period of (rupee) depreciation, shocks originating in the NDF market may carry more information, which get reflected in the on-shore segments of the market through mean and volatility spillovers. During the period of the rupee appreciation, the NDF market and the rupee spot market exhibit a bi-directional relationship,’ the RBI had said quoting its internal study.
Next Story
