Rupee-dollar derivatives set to enter stock exchanges in GIFT City IFSC

Rupee-dollar derivatives are set to enter stock exchanges established by the BSE and NSE in the International Financial Service Center (IFSC) at GIFT City in Gandhinagar, Gujarat after the government published a gazette notification amending the Foreign Exchange Management Act (FEMA) thereby paving the way for rupee derivatives at exchanges in GIFT City.

The Reserve Bank of India (RBI) is now expected to issue detailed regulations for the same. The purpose for this facility is to bring the offshore rupee market, onshore. As of now huge rupee trades take place in overseas no-deliverable forwards (NDFs).

At present, cross-currency trades are permitted on the International Exchange (INX) floated by the BSE and NSE IFSC exchange situated in GIFT City IFSC. However, the volume of trade there is miniscule because rupee exchange trades are not permitted.

In 2018, the Bank of England reported $23 billion in offshore rupee trades, while RBI sources estimate deliverable daily onshore forwards at $21 billion for 2019, indicating that rupee’s offshore market has become bigger than the domestic market.

The RBI taskforce headed by Usha Thorat has recommended allowing rupee exchange rate derivatives on Indian soil in exchanges set up in GIFT city. The RBI, however, expressed reservations over worries of the impact on domestic market. However, that impact is also observed when there is a huge movement in the international (offshore) market.

Exchanges in GIFT city operate 22 hours a day and hence foreign portfolio investors would find it efficient to hedge their requirement on NDF which can now be on the GIFT city based exchanges, once RBI issues regulations.

RBI restricts the participation of resident entities in currency derivatives on Indian exchanges to the extent of their underlying exposures. A large market, outside the influence of regulatory authorities, undermines their effectiveness. And, at GIFT IFSC exchanges, all products in derivatives are permitted except rupee exchange rate derivatives.

NDF markets are not a phenomenon peculiar to the rupee; they are common for currencies of many emerging market economies (EMEs). According to BIS data, NDFs in six currencies – Korean Won, Indian Rupee, Chinese Renminbi, Brazilian Real, Taiwanese Dollar and Russian Rouble – account for about two-thirds of the trade in NDFs globally. The total daily average volume in NDF markets is about $ 200 billion according to a Bank of International Settlements (BIS) survey.

New Exchange

• RBI allowed rupee futures and options settled in foreign currency
• The daily volume in NDF markets is $200 bn
• 2/3rd of this volume is in currencies of Korea, India, China, Brazil, Taiwan and Russia
• India's share is 18.22% of the trade in NDFs globally
• In 2018, $23 bn was in offshore rupee trades
• In 2019, onshore daily forward volume was $21 billion