In an attempt to halt the rupee’s fall, the Reserve Bank of India has asked local banks not to increase their positions in the non-deliverable forward market. This request, according to bankers and traders, could cause offshore volatility to spill over into local markets.
According to one of the bankers, the RBI is being forced to use more reserves to defend the rupee because of the buildup of positions in this market segment.
In contrast to the directives it gave in June 2020, which permitted banks operating from the International Financial Services Centre Banking Units to trade in the NDF segment, the RBI’s informal communication to local bankers is a step backward.
After research revealed that the NDF market, which was dominated by foreign banks and over which the RBI had little control, fuelled volatility and often drove the spot rupee lower in stressful conditions, the central bank took action in 2020. If Indian banks were permitted to trade in the market, RBI would have more control.
Although the spot rupee is already under pressure, increased trading in the category has raised demand for dollars, requiring RBI’s assistance.
According to the RBI’s assessment, the NDF was ‘nullifying the impact of their intervention’ and increasing forward market liquidity, both of which it desired, according to Kotak Securities’ head of research for forex and interest rates, Anindya Banerjee.
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