USD/INR Trade: RBI May Consider Intervening in NDF Market, Says SBI Report

The US Dollar (USD)/Indian Rupee (INR) should be trading in a high zone, but ideally the 23-year average should not be above 76-78 for 1 USD, with an appreciation bias , according to a report by the State Bank of India’s Economic Research Department (ERD).

The aforementioned projection assumes that the Russian-Ukrainian conflict would drag on for the time being.

Referring to the alternative settlement mechanisms being considered by some nations keen to pursue inter-territorial exchanges of a compulsory nature, circumventing Western sanctions, Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, said: “…this should present the moment of also taking into account the internationalization of the rupee, which underlies the need to evolve alternative payment and settlement mechanisms. Let’s catch the iron when it’s hot!

The SBI Ecowrap report noted that during the global financial crisis, the rupiah continued to decline and lost around 13% from January 2008 to July 2011.

However, in the post-crisis period, volatility had become significant (4.6%) and the INR fell by 41% between July 2011 and November 2013.

But recent bouts of rupee volatility have been much smaller and lower forex volatility in India (USD/INR volatility move around 1-2%) has reduced downside risks, and therefore ERD expects the rupiah not to be affected in a major way.

“However, in fact, one should not rule out episodic currents of local currency volatility against the USD in the event of further negative geopolitical surprises,” Ghosh warned.

Intervention of the NDF

The report observed that RBI may consider intervening in the Non-Deliverable Forward (NDF) market instead of the onshore market through banks during the Indian time zone.

“This has the advantage of not affecting the liquidity of the rupee. Additionally, the majority of USD buying in the onshore market follows the offshore market, whether for view-based trades or arbitrage. Intervening directly in the NDF market will reverse the arbitrage,” Ghosh said.

The ERD pointed out that with the onset of global turmoil, offshore market participants have now also become USD buyers, which would have further pushed the rupee lower.

“In this context, a known unknown that could be clearly known is the publication of offshore market rupee transaction data by RBI (currently unpublished) which would give a lot of transparency and credibility to the market! By releasing the data, even with a lag, the RBI could actually move the market with it!the report suggested

What is the NDF market?

NDF markets have generally moved for currencies subject to currency convertibility restrictions, especially in emerging Asian economies, RBI officials Sangita Misra and Harendra Behera said in a 2006 occasional paper.

“With the controls imposed by local financial regulators and therefore the lack of a natural futures market for non-domestic players, private companies and investors investing in these economies are looking for alternative ways to hedge their exposure to these currencies. .

“Against this backdrop, non-deliverable forward contracts have become popular derivative instruments responding to the demand for hedging from offshore investors. NDFs are types of derivative products that allow non-convertible or restricted currencies to be traded without delivery of the underlying currency,” the officials said.

Trading on the NDF market usually takes place in offshore centers. In this market, no exchange takes place of the principal sums of the two currencies; the only cash flow is the movement of the difference between the NDF rate and the prevailing spot market rate and this amount is settled on the settlement date in a convertible currency, usually US dollars, in an offshore financial centre, the newspaper said.

The other currency, usually an emerging market currency with capital controls, is not deliverable.

Published on

March 14, 2022

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