RBI draft on INR derivatives may push more banks to expand in GIFT City

RBI's proposal restricting access to rupee NDDCs to banks with IFSC units could deepen lender presence in GIFT City, while offshore ETP rules signal calibrated liberalisation

The recent draft norms of the Reserve Bank of India (RBI) allowing authorised dealers to undertake rupee non-deliverable derivative contracts (NDDCs) having operations in IFSC Banking Unit, will incentivise banks to deepen their presence in GIFT City in Gujarat’s Gandhinagar-Ahmedabad Metropolitan Region, said experts.

 

The draft proposes that Authorised Dealer (AD) Category-I banks may undertake NDDCs with other ADs and overseas entities, including International Financial Services Centre (IFSC) Banking Units (IBUs) and Offshore Banking Units (OBUs), either directly or on a back-to-back basis through their overseas branches. Such contracts may be cash-settled in rupees or any foreign currency, subject to the condition that the bank, or its non-resident parent, has an operating IBU. 

“The permission for offshore Electronic Trading Platforms (ETPs) comes with a significant caveat, as the access to NDDCs has been restricted only to banks with an operating IBU. It indirectly gives a push to increase operations in the IFSC,” said Rohit Jain, managing partner, Singhania & Co. 

Experts said that the central bank’s proposal to allow ADs to trade forex (Fx) and interest rate derivatives on offshore ETPs marks a calibrated liberalisation of India’s forex regime.

 

“The proposed changes represent the RBI's calibrated responses to evolving roles of Indian authorised dealer banks and will be well-received. Specific inclusion of market-making and proprietary positions as purposes for OTC transactions, permission for entry into non-deliverables with non-bank entities, and clarity on offshore ETP trades are especially welcome and would, to some extent, help bridge the competitive gaps between Indian and foreign banks in this space,” said Jian Johnson, partner, Cyril Amarchand Mangaldas.

 

The RBI has proposed to permit ADs to undertake forex and currency interest rate derivative transactions on ETPs outside India, subject to defined regulatory safeguards.

 

Under the draft framework, such offshore platforms must be located in Financial Action Task Force (FATF) member jurisdictions and regulated by authorities affiliated with the Committee on Payments and Market Infrastructures (CPMI) or the International Organisation of Securities Commissions (Iosco). For trades involving the rupee, ADs may transact only with non-residents, and the offshore ETP operator will be required to publicly disseminate transaction data.

 

Further, the central bank has consolidated norms governing how ADs deploy surplus foreign currency funds. Subject to a board-approved policy, ADs may undertake overnight placements, reverse repos of up to one year against overseas sovereign debt, investments in overseas money market or sovereign debt instruments of up to one-year maturity, and lending in rupee or foreign currency in terms of the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Undeployed Foreign Currency Non-Resident (Bank), or FCNR (B), funds may also be invested in long-term overseas sovereign debt, subject to residual maturity conditions.