RBI's Usha Thorat panel for easier foreign play in currency market

A Reserve Bank of India (RBI)-appointed task force on offshore rupee markets has recommended that Indian banks be allowed to “freely offer prices to non-residents” and extend local market timings to match that of the offshore derivatives markets to take the sting out of the speculative positions taken there.

Non-residents can also be allowed wide access to the FX-Retail trading platform as a “major incentive to use the onshore market,” the task force, headed by Usha Thorat, former RBI deputy governor, said.

The committee submitted its report to the RBI governor on Thursday.

To dampen the dominance of the offshore non-deliverable forward (NDF) market, which currently has more volume than onshore markets, the task force suggested that the International Financial Services Centre (IFSC) should be allowed to offer non-deliverable rupee derivatives in a phased manner.

“To start with, trading may be permitted only on exchanges due to the inherent transparency and risk management benefits offered by it. Introducing OTC (over the counter) contracts may be considered at a later stage after the experience gained from trading on exchanges,” the task force recommended.

Even as the IFSC is located in India, for all practical purposes, it is an offshore market such as those in Singapore, Hong Kong, London, Dubai and New York. But bringing volume to Indian shores would mean better information dissemination.

In the offshore NDF market, no physical delivery of rupee takes place, but its volume far outstrips those in the domestic interbank market.

“The sharp growth in the offshore trading volumes in the rupee NDF market in recent years likely even beyond the volumes in the onshore markets have raised concerns around the forces that are determining the value of the rupee and the ability of authorities to ensure currency stability,” the task force observed.

Even as the IFSC be allowed to offer trading in rupee derivatives, the settlement will have to be done in foreign currency.

The task force strongly discouraged local banks from going to the offshore markets, and said it was prudent not to go for full convertibility of the rupee.

Similarly, even as there have been some issuance of rupee-denominated bonds, internationalisation of rupee was “still a distant goalpost given the persistent current account deficit and the negative net international debt position”.

“The task force believes that India’s approach to the trade-off between deregulation of currency markets and tolerance of offshore market must be shaped by the specific considerations of the Indian economy rather than following any global template blindly,” said the report.

The task force said the onshore market hours for the currency markets “be suitably extended to match the flexibility provided by the offshore market and thereby incentivise non-residents to hedge in the onshore market”.

Usha Thorat panel suggestions

• Extend onshore market hours to improve access of overseas users

• Allow Indian banks to freely offer prices to global clients around the clock

• Enable rupee derivatives in IFSC

• Allow $100-mn exposure in OTC without any underlying exposure

• Centralise KYC across all markets with uniform documentation

Even as the volume in the offshore markets taken together all locations could be more, the onshore rupee derivatives market is “currently more deep and liquid”. Therefore, Indian banks should not be permitted to deal in the offshore rupee derivative market at present, as “participation of the Indian banks in the offshore market might, over time, take away this advantage”.

The task force suggested that while underlying exposure would be required for trading in the onshore market, users may be allowed to undertake positions up to $100 million in OTC, as well as exchange-traded currency derivative market, without having to establish the underlying exposure.

For non-residents, a central clearing and settlement mechanism for non-residents can be developed for deals in the onshore market.

“The issue of taxation in respect of foreign exchange derivative contracts may be examined with the objective of overcoming gaps between the tax regime in India and other major international financial centres to the extent possible,” the task force said.

The KYC registration should be centralised across the financial markets with a uniform documentation requirement.

“This will ensure that non-residents undertake the KYC process only once and not with each financial intermediary that they deal with in the onshore market. Also, such a mechanism offers cost and efficiency benefits for the financial intermediaries,” the task force said.

Comments on the report can be submitted by August 31.