RBI expansion of NDF access to help manage Indian rupee volatility – analysts

An IFSC Banking Unit or “IBU” is a bank permitted by the Reserve Bank of India to operate from an International Financial Services Centre (IFSC).

They were earlier permitted to transact in rupee NDF forex derivatives contracts with non-residents and with other eligible banks.

“The impact will be improved price discovery in India, bringing offshore volumes here and better opportunity for residents to hedge their books,” a senior trader at a public sector bank, who did not want to be named because he is not authorised to speak to the media.

Moreover, there will less arbitrage between NDF and the onshore market, helping in managing the rupee, he added.

In times of heightened volatility, the USD/INR NDF rates tend to be higher than the onshore rates, leading to arbitrage opportunities and a spillover of offshore volatility.

When rupee fell to a record low in October 2022, the USD/INR 3-month rate on NDF was about 40 paisa higher than onshore. This fuelled more demand for dollars onshore, adding pressure on the rupee. This measure will further deepen the FX market in India and provide enhanced flexibility to residents in meeting their hedging requirements, RBI governor Shaktikanta Das said in his policy speech.

When the RBI puts out the final guidelines, “it will have to be seen whether residents will need to provide evidence of an underlying forex exposure,” a sales head at a private sector bank said.

“Currently for NDF, underlying is not needed,” he said.