India is taking its first baby steps to tackle a growing offshore market for its currency. Two exchanges — India International Exchange (IFSC) and NSE IFSC — on Friday began trading foreign-exchange settled rupee derivatives, part of a push to bring the market back home.
The launch comes amid the world’s most expansive coronavirus lockdown, which has crippled businesses and hurt trading volumes in the country’s financial markets. The timing may make it harder for the contracts to gain traction even as volumes in rupee trading overseas continue to grow.
“Volumes in an exchange typically take time to pick up,” said Abhishek Goenka, chief executive at India Forex Advisors. “The bid-ask spreads have to come down and a lot of market-making has to happen to get decent activity.”
India’s policymakers have been increasingly concerned about the growing heft of the rupee trades in venues overseas. The average daily volume for the rupee in London totaled $47 billion in April 2019, according to the Bank for International Settlements. That’s a fivefold jump from 2016, and more than the $34.5 billion of trades executed locally at the time.
Finance Minister Nirmala Sitharaman launched trading on the two exchanges, both of which are located at a special hub in the GIFT City in western India, envisioned by then Gujarat chief minister Narendra Modi to rival Singapore as a financial services center.
“This new reform will help India to become a net exporter of financial services, presently being lost to other financial centres across the world,” said Tapan Ray, managing director and group chief executive at GIFT City said.
Offering onshore rupee derivatives is similar to what Indonesia attempted in 2018, when it launched non-deliverable forward contracts settled in rupiah.
While the forex-settled rupee derivatives may take time to take off, the move will help the Reserve Bank of India get a better grip on the working of the NDF market and help investors get better quotes than the spreads they are charged offshore, India Forex’s Goenka said. INX India, one of the exchanges launching the contract, is looking at positioning itself against venues in Singapore or Dubai offering similar rupee contracts. The lot size for a standard contract on INX is one million rupees while the NSE has it at Rs 20 lakh.
“This is a rock star product for us,” said V. Balasubramaniam, chief executive at INX India. “We are looking getting at least 50 per cent of volumes generated by these exchanges in the first quarter of operations.” The RBI has allowed local banks to participate in the offshore currency market from June 1, which could pose another obstacle to onshore contracts from becoming popular, analysts say.
NDFs, nominally a tool for hedging, are popular with investors who want to bet on the currency without taking delivery. They’re often used in major financial centers in place of currencies that don’t trade round-the-clock.