Foreign branches of Indian banks, and those located in the International Financial Services Centre (IFSC) in GIFT City traded in non-deliverable forwards (NDF) for the first time on Monday.

The (RBI) in the past was against this market, but gave way when it was found that the offshore volume in rupee trading is higher than the onshore volume. Rupee trading in London alone, for example, is way more than the onshore volume. Data from Bank for International Settlement (BIS) shows that as on April 2019, the average daily volume of rupee was $47 billion, whereas the average daily volume onshore was less than $40 billion. Apart from London, NDF markets exist in Singapore, Hong Kong and New York.

A committee headed by former deputy governor Usha Thorat advised the RBI to bring some of the volume onshore by allowing located in IFSC to offer quotes for clients. RBI in March said foreign branches of will also be allowed to give quotes to clients, effective June 1.

And so, 12 with foreign presence, including State Bank of India, Bank of Baroda, ICICI Bank, HDFC Bank, among others traded in NDF.

There was no statement yet from IFSC on the first day trade, but some of the banks spoke on condition of anonymity.

According to the bankers, the volume generated in IFSC was not as high as expected as banks were not equipped with adequate systems and processes, and manpower amid a lockdown. The trading desk is not the same as the local unit. Importantly, the foreign branches entering into NDF trading are regulated by the countries where they are based of, and data dissemination may not be on a real time basis. Besides, the presence of banks in IFSC makes them technically offshore. The branches there have no reserve ratio requirements like their parents incorporated in other parts of India.

“What it enables though is taking part in any arbitrage opportunity. And it now allows the RBI to intervene in these markets through these banks. Earlier, the RBI used to take services of other central banks,” said the head of treasury of a foreign bank. With the entry of Indian banks, the forward points between two markets will also likely merge. Indeed, as the rupee closed at 75.55 a dollar on Monday, the NDF markets also reflected a similar level.


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