Now, the Reserve Bank of India (RBI) wants to know all about them under a proposed rule that many foreign banks operating in India are resisting.
why? First, they do not have access to information about offshore transactions that are difficult to track across geographies; Second, there are issues around jurisdiction – how much information about transactions in other parts of the world can be shared with authorities in India.
Descriptions and Constraints
Say, a Wall Street fund shorting the rupee, backing the view that the Indian currency will depreciate, enters into a derivative contract with Citi New York. Or, a British MNC has operations here, cutting a similar deal with HSBC London.
Such derivatives, used to trade non-convertible currencies, are flourishing in the non-deliverable forward (NDF) market in London, New York, Singapore, Hong Kong and even Dubai.
Neither Citi India nor HSBC India may be aware of transactions targeting their banks’ coffers in various foreign markets. However, in a draft, the RBI has proposed that foreign banks in India, which are regulated by the Reserve Bank of India, disclose the details of NDF transactions – notional value, counterparty name, maturity date, etc. The data will be shared with Clearing Corporation of India (CCIL) which clears and settles GoI bonds, money markets, derivatives and markets.
The intent of the arrangement is clear. Greater visibility into what is going on in the NDF market can enhance the RBI’s ability to intervene onshore as well as in the NDF market to prevent rupee volatility or sudden depreciation or appreciation.
“It seems difficult. It is impossible to track NDF transactions linked to the rupee or rupee interest rate in the markets. Unless the Indian branch of the foreign bank is involved, there is no rule or mechanism to exchange such information. Also, there are restrictions against sharing information freely with foreign clearing houses in various markets. It is only required as a rule on the Indian country’s decision to share the information of the home country. Dealings with foreign authorities should be with the RBI. Come clean,” said a senior banker.
Some MNC banks are meeting RBI to explain the problems. One can try one’s best but keeping Indian offices of foreign banks responsible for collecting and sharing all NDF details within the same day or two working days can be difficult, even impossible, another person said.
Partnering with CCIL may also require the consent of foreign buyers in the NDF market, currency dealers said.
Nature of the market
In arbitrage transactions, where banks pay cash on the price difference between the INR-USD forward in the onshore market and the NDF market in India, the bank in India, which participates in one part of the transaction, obviously knows about the other leg in the NDF market. However, when the transaction is between the bank and the customer, both of whom are located abroad, information about the NDF transaction will not be readily available to the Indian office of that bank.
According to market sources, while the RBI may be keen on establishing a data collection framework, the move is likely to get a boost after Asia’s largest primary dealer agreed to share data on NDF rupee interest rate derivatives (IDR) within a fortnight. “The IDR-NDF market is a part of the Forex NDF market. The main benefit of the RBI will be access to currency NDF data,” said a banker.
While Indian banks like SBI and ICICI with overseas branches may be willing to share information, foreign banks are reluctant.
In the NDF market, as the name suggests, rupees are not transferred abroad. Instead, NDF contracts are usually settled in USD, based on the difference between the agreed price and the spot price at maturity. If the rupee depreciates, foreign portfolio investors (FPIs) holding stocks in India may hedge currency losses by shorting the rupee. In many cases, it may speculate without any real exposure if it has a view that oil price tightening and currency account deficit may affect the INR. Such transactions may widen the gap between onshore and NDF (or the offshore market), causing a bank (or large company) to buy in India and sell in NDF. Such buying pushes the dollar higher as the effects of the NDF deal ripple through the Indian market.
An RBI spokesperson did not comment on the matter.
