INSUBCONTINENT EXCLUSIVE:
By Bharat RathodPartha BhattacharyyaIf the history of the rupee were to be written, the story of its evolution would sound like one of a
that even in the early 2000s, the first spot rupee quote just before 9 am had to factor in all international developments, expected forex
Having gone without any price discovery all night, the market would look to the opening quote from SBI to factor in all these disparate
considerations.
Since then a vibrant non-deliverable forward (NDF) market has developed and volumes have grown exponentially
This, coupled with the launch of the currency futures (CF) market, both in India and overseas, have made the rupee a constantly tracked and
Now the opening quote of rupee in India straightway flows from the ongoing NDF market rate.
The exchange-traded turnover of rupee has grown
exponentially at a CAGR of 12-15 per cent since the last four years with nearly 25 to 30 per cent of total exchange-traded volumes coming
from the offshore CF platforms
And the ratio of offshore exchange traded to onshore exchange traded USD-INR turnover has gone up sharply to 45 per cent in the first eight
months of 2018 from 31 to 35 per cent in the previous three years, indicating a growing influence of offshore market on USD-INR rate
movement.
Also, if CF volumes for the first eight months of 2018 are annualised, CAGR of offshore CF market zooms to 49 per cent compared
with the CAGR of onshore CF market that touched 16 per cent.
The above data does not capture bank-to-bank (B2B) and bank-to-customer (B2C)
In absence of any reliable source for this market turnover, some estimate USD-INR NDF turnover to be at least equal to, if not higher, than
USD-INR onshore OTC turnover.
Clearly, offshore markets now determine not only the USD-INR levels but, quite often, the direction of the
convertibility back in 1994
India started laying down a road map for capital account convertibility (CAC) from 1997 onwards.
At that time, three fundamental
prerequisites for CAC were identified: fiscal consolidation, a mandated inflation target and strengthening of the financial infrastructure
After 20 years, strained corporate balance sheets, considerable bank non-performing assets, the current account deficit and the volatility
of the rupee itself continue to pose challenges towards CAC.
Additionally, macro-economic conditions remain vulnerable to sudden external
sector shocks if the currency is made fully convertible at this stage.
For foreign portfolio investments (FPIs) and foreign direct
investments (FDIs), the market is essentially open; and the Indian rupee, for all practical purposes, is fully convertible.
But there is
Most market theorists would appreciate that a healthy dose of speculation is key for the development of a robust marketplace
Unfortunately, these players are viewed as counterproductive to a stable rupee.
The regulators have, therefore, imposed a comprehensive
exchange control architecture to curb speculation on the Indian rupee
These are supposed to act as major deterrents to speculative trading by corporates using their forex exposure.
It is debatable if this has
played a key role in ensuring a stable currency for a sustained period of time, except the spikes seen in 2013 and now in 2018.
Indian
These include allowing access to the onshore market for hedging by FPIs, permitting investment in bonds by FPIs and gradually increasing
limits, reducing the lock-in period, permitting investments in shorter tenor bonds etc.
Recent measures by RBI and GoI aimed at stabilising
the rupee, like waving off withholding tax on masala bonds, increasing custom duties on certain items, increasing the ECB quantum for OMCs,
relaxation in hedging requirements, look more like short-term incremental measures rather than reform style initiatives.
While full capital
account convertibility seems far away, considering the macro situation, it is still worth discussing how one could work towards developing a
healthy market around rupee trading.
The regulator must assess the cost of having a tight control on the OTC market
decline in this ratio is a major constraint for RBI to have an effective and impactful intervention strategy to control sharp depreciation
to effectively intervene is gradually getting eroded.
Tight control over the OTC market while permitting speculation in another market (i.e
currency futures market) creates arbitrage opportunities for participants
While the market is eagerly awaiting the outcome of the recent initiative to revisit Fema regulations, policy makers need to maintain the
momentum and gradually dismantle the current complex exchange control regime.
Some suggestions to be considered include:1) Relaxation of the
to cover its forex exposure in the onshore OTC market
These guidelines are leading genuine hedgers to explore CF and NDF markets just to avoid the detailed documentation requirements
This would move a lot of hedgers, who are now going to CF and NDF markets, to onshore OTC market and allow RBI to have a lot more insight
have a strong impact on containing currency volatility with more efficient deployment of forex reserves
In an NDF market one only needs a limited amount of dollars for settlement relative to the nominal contract value
RBI could use any other central bank or an overseas branch of an Indian bank, say SBI, or even set up an overseas SPV to execute such
volatility in a more efficient way.
3) Developing a money market floating rate benchmark: RBI and Sebi can influence lenders and investors
to apply 90/180 day T-Bills as the standard for all loans/CPs/floating rate bonds
This would fill the existing need for a market-linked floating rate term money market benchmark
A transparent and well-traded benchmark will in turn drive a deeper and more liquid derivatives market
forex forwards beyond 1 year tenure can then move away from the current illiquid MIFOR benchmark.
Markets will eventually adapt to the new
dynamics and corporate treasurers will learn the techniques to protect their balance sheets from currency volatility.
Instead of passively
departments across India would learn new skills, gain confidence and ultimately enhance the efficiency of the onshore forex market to the
point where it can compete with offshore players.
This, combined with the use of technology, access to information and market insight could
