Offshore markets are influencing Rupee movement, reveals RBI study
24 Aug 2013 4:17 AM IST
The non-deliverable forwards (NDF) markets are exerting more pressure on onshore currency market, especially when rupee is under stress, the Reserve Bank of India said that in its annual report quoting an internal research.
'During the period of (rupee) depreciation, shocks originating in NDF market may carry more information, which get reflected in the on-shore segments of the market through mean and volatility spillovers,' says the study.
The rupee has plunged nearly 21 per cent so far this fiscal.The NDF is a foreign exchange derivative instrument traded over-the-counter and is operated in currencies that are not freely convertible like rupee.
The market enables hedging of exchange rate risks, irrespective of any restrictions arising in the currency of origin.The analysis says there is a long-term relationship between the spot and the NDF markets for the rupee.
'During the period of the (rupee) appreciation, the NDF market and the rupee spot market exhibit a bi-directional relationship,' says the study.
However, at times of rupee fall, relationship turns unidirectional from the NDF to onshore market, the study notes. The NDF, or the offshore, market remains outside the regulatory purview of the Reserve Bank. Domestic financial institutions are not allowed to transact in the NDF markets.
However, since the domestic banking entities are allowed specific open position and gap limits for their foreign exchange exposures, there is scope for these entities to participate in the NDF markets to take advantage of any arbitrage.Foreign banks and corporate entities with an international presence can participate in the NDF market. Meanwhile, Despite foreseeing a possible spike in gross non-performing assets to 4.4 per cent of the total advances by March 2014 from 3.42 per cent a year ago, the Reserve Bank ruled out any systemic risk to the system, saying banks will still be having higher capital adequacy.
‘Our stress tests suggest that under a severe stress scenario, the gross NPA ratio of banks may rise to 4.4 per cent by March 2014 but even under such a scenario the system level capital adequacy ratio of banks will be 12.2 per cent only, which is well above the required 9 per cent,’ RBI said in its annual report. The RBI follows an accounting period of July-June.
‘The system wide gross NPAs rose to 3.42 per cent in FY13 from 2.94 per cent in FY12. This is likely to touch 4.4 per cent in FY14 (March ‘14),’ RBI said.
'During the period of (rupee) depreciation, shocks originating in NDF market may carry more information, which get reflected in the on-shore segments of the market through mean and volatility spillovers,' says the study.
The rupee has plunged nearly 21 per cent so far this fiscal.The NDF is a foreign exchange derivative instrument traded over-the-counter and is operated in currencies that are not freely convertible like rupee.
The market enables hedging of exchange rate risks, irrespective of any restrictions arising in the currency of origin.The analysis says there is a long-term relationship between the spot and the NDF markets for the rupee.
'During the period of the (rupee) appreciation, the NDF market and the rupee spot market exhibit a bi-directional relationship,' says the study.
However, at times of rupee fall, relationship turns unidirectional from the NDF to onshore market, the study notes. The NDF, or the offshore, market remains outside the regulatory purview of the Reserve Bank. Domestic financial institutions are not allowed to transact in the NDF markets.
However, since the domestic banking entities are allowed specific open position and gap limits for their foreign exchange exposures, there is scope for these entities to participate in the NDF markets to take advantage of any arbitrage.Foreign banks and corporate entities with an international presence can participate in the NDF market. Meanwhile, Despite foreseeing a possible spike in gross non-performing assets to 4.4 per cent of the total advances by March 2014 from 3.42 per cent a year ago, the Reserve Bank ruled out any systemic risk to the system, saying banks will still be having higher capital adequacy.
‘Our stress tests suggest that under a severe stress scenario, the gross NPA ratio of banks may rise to 4.4 per cent by March 2014 but even under such a scenario the system level capital adequacy ratio of banks will be 12.2 per cent only, which is well above the required 9 per cent,’ RBI said in its annual report. The RBI follows an accounting period of July-June.
‘The system wide gross NPAs rose to 3.42 per cent in FY13 from 2.94 per cent in FY12. This is likely to touch 4.4 per cent in FY14 (March ‘14),’ RBI said.
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