Reserve Bank of India (RBI) permitted the banks in India to offer Rupee interest rate derivatives such as overnight indexed swaps (OIS) to non-residents. 

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

The announcement of the Central Bank permission was made by Governor Shaktikanta Das. 

This will reduce the segmentation between the onshore and offshore markets and, enable more efficient price discovery, the RBI said. 

The move will further deepen the interest rate derivatives market in India, an RBI statement said.

"Now it has been decided to allow banks in India to undertake transactions in the offshore Foreign Currency Settled-Overnight Indexed Swap (FCS-OIS) market with non-residents and other market makers. This will reduce the segmentation between the onshore and offshore markets, enable more efficient price discovery and further deepen the interest rate derivatives market in India," the RBI statement said.

The three-day Monetary Policy Committee (MPC) meeting which began on 8 February concluded today. The Committee decided to leave repo rate and reverse repo rate unchanged for the straight 10th time at 4 per cent and 3.35 per cent respectively.

The six-member committee also decided in favour of maintaining an accommodative stance with five members voting for it while one against it. 

"Permitting banks to deal in the offshore Foreign Currency Settled Overnight Indexed Swap (FCS-OIS) market will definitely improve the liquidity in the interest rate derivative markets in Indian markets," Anil Gupta, Vice President & Co-Group Head at ICRA, said.

“The Reserve Bank of India allowed offshore units of Indian banks to participate in the offshore rupee derivative market to curtail volatility in currency markets due to the Covid pandemic. It can be noted that the ongoing financial market volatilities triggered by the coronavirus outbreak dragged the rupee to touch lifetime lows and also breached the 75-mark against the US dollar," Ravi Singh, Vice President & Head of Research at Shareindia said.

"The move will augment liquidity in NDF, and this gives an opportunity to the RBI to intervene in the NDF market, which has caused considerable volatility in the past on local exchange rate,” he added.

An NDF is a foreign exchange derivative contract, which allows investors to trade in non-convertible currencies, with contract settlement in a convertible currency (mostly US Dollars). NDFs trade principally beyond the borders of the currency’s home jurisdiction (‘offshore’), enabling investors to transact outside the regulatory framework of the home market (‘onshore’), as mentioned by RBI.

RBI announced that banks in India can now transact in the offshore Foreign Currency Settled Overnight Indexed Swap (FCS-OIS) market with non-residents and other market makers. Banks can participate through their Indian branches, their foreign branches, or their IFSC Banking Units. 

In addition to adding liquidity to the domestic OIS market, the initiative encouraged diversity in participation and reduced segmentation between the onshore and offshore markets. Banks will now be allowed to participate in the non-deliverable forward (NDF) market, which has been primarily dominated by offshore traders in the Indian foreign exchange market.