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As a step to deepen the domestic market for foreign exchange, the offshore market needs to move onshore, including derivatives for the rupee, feels the Reserve Bank of India (RBI).
The non-deliverables rupee market is a symptom of growing international interest in a currency not fully convertible. The growing importance of India in the global economy has led to an increasing interest in the rupee, said G Mahalingam, executive director, RBI, in his address at the India Treasury Summit on Wednesday. The central bank has put the speech on its website.
Interest in the rupee, along with the existence of capital controls in the onshore market, has led to the development of an offshore rupee market, mainly in Singapore, Dubai, London and New York, said Mahalingam.
There has been a significant increase in both depth and liquidity in the spot and forward market segments. This could be gauged from the rise in the average daily foreign exchange market turnover from $16 billion in 2005-06 to nearly $55 bn in 2014-15 so far. The depth of the foreign exchange market can also be gauged from the fact that the bid-offer spread in the dollar-rupee pair is narrow.
Going forward, it is imperative to try to bring the offshore activities onshore, to the extent possible, to deepen the domestic markets and thereby enhance the trickle-down benefits, said the ED.
RBI has taken steps to liberalise the currency futures market to obviate/reduce the need for the non-deliverables forward market. This might help in bringing some offshore participants onshore and reducing the reliance of such participants on the offshore market.
