According to a latest update from the Reserve Bank Of India, there is evidence that onshore exchange rate, especially in times of volatility, is guided by the price movements in offshore markets. Over a period, regulation shave been liberalised to permit Rupee invoicing of trades, Rupee borrowings under the External Commercial Borrowings (ECB) route, issue of Masala Bonds, centralised hedging etc., which have increased Rupee exposure of non-residents. There is evidence that onshore exchange rate, especially in times of volatility, is guided by the price movements in offshore markets.
The central bank noted that linkages between onshore and offshore Non-Deliverable Forward (NDF) markets show that when Rupee is appreciating, there is a bi-directional relationship between the two markets, while there is a unidirectional impact of NDF market on onshore market when the Rupee is depreciating. The results indicate that with increasing volumes of NDF market, the rupee is likely to become more prone to shocks emanating from overseas markets. The Group also carried out an empirical analysis to assess the impact of NDF closing prices on the forex opening prices in the domestic market for the period 2010 -2018. The assessment indicated a strong bi-directional causality between NDF prices and onshore forex prices, which is statistically significant.
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