India's bid for tighter grip on rupee trading is put to test

Mumbai

INDIA'S most ambitious step to get a tighter grip on rupee trading, which has been shifting to markets like London and Singapore, is being put to the test as the nation's banks start trading the currency in offshore markets.

Twelve local lenders, including State Bank of India, Bank of Baroda, Axis Bank Ltd, and ICICI Bank Ltd, were allowed to trade in the Non Deliverable Forward (NDF) market for the currency from Monday.

Reserve Bank of India (RBI) governor Shaktikanta Das had made a surprise announcement in March allowing certain banks to trade the rupee offshore. The nation is seeking to strengthen its regulatory grip on rupee trading as blowouts in offshore prices tend to disrupt exchange rates for the currency. The move closely follows India kicking-off its domestic NDF market in May with two exchanges starting trading in forex-settled dollar/rupee contracts.

"Participation of Indian banks, who have real-time access to both onshore spot, forward, and NDF market would help in curbing volatility," said Subrat Kumar, general manager-specialised integrated treasury at Bank of Baroda. "It will also add new non-resident customers to their fold by offering better pricing and liquidity."

The NDF, nominally a tool for hedging, is also popular with investors who want to bet on the future direction of a currency without taking deliveries. They're often used in major financial centres in place of currencies that don't trade round the clock.

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The average daily volume for the rupee in London totalled US$47 billion in April 2019, according to the Bank for International Settlements. That's a five-fold jump from 2016, and more than the US$34.5 billion of trades executed locally at the time.

"We expect a cautious start with interbank dealing likely taking the lead in terms of volumes," said B Prasanna, group head for global markets sales, trading and research at ICICI Bank Ltd in Mumbai. "Indian banks can potentially offer competitive pricing using both onshore and offshore access."

ICICI Bank started trading in the dollar/rupee contracts, dealing with both clients and other banks in the Singapore market on Monday, the lender said. With volumes of US$2.3 billion, the dollar/rupee contracts accounted for 15 per cent of trades in the Singapore NDF market at 2:50pm, according to data from The Depository Trust & Clearing Corp. The one-month contract inched down 0.1 per cent to 75.65.

The lenders should have branches in a special hub called the International Finance Services Center in GIFT City in western India to be eligible to trade in offshore currency markets. BLOOMBERG