RBI allows rupee non-deliverable forex derivative contracts to residents

Step will help develop onshore Indian rupee NDDC and provide residents with the flexibility to design hedging programmes

The regulator’s decision to allow banks to offer Indian residents rupee non-deliverable foreign exchange derivative contracts (NDDCs) will help eliminate arbitrage between domestic and overseas markets, said experts on Thursday.  

Indian banks, which operate International Financial Services Centre (IFSC) Banking Units (IBUs), can offer rupee NDDCs in the onshore market, said the Reserve Bank of India in a statement on Thursday.

The derivative contracts will be settled in rupees and the central bank will issue directions about them separately, said the statement on developmental and regulatory policies issued along with monetary policy.

RBI said the step intended to develop the onshore Indian rupee (INR) NDDC and provide residents with the flexibility to efficiently design their hedging programmes.

“Bringing the NDF markets to the International Financial Services Area is a welcome move as we may see more realistic forward rates for the rupee against most currencies,” said Abizer Diwanji, head--financial services, EY India.

Indian banks operating units in the International Financial Services Centre were permitted to transact in rupee NDDCs with non-residents and with each other with effect from June 1, 2020.

These banks will have the flexibility of settling their NDDC transactions with non-residents and with each other in foreign currency or in INR while transactions with residents will be mandatorily settled in INR.

Venkat Nageswar Chalasani, a financial consultant and former deputy managing director at State Bank of India, said residents will have access to NDF markets and more hedging products can be introduced.  

Any arbitrage between NDF and domestic markets can be nullified. There will not be an outflow of dollars as settlement with residents is going to happen in rupee alone, he said.