reserve Bank of IndiaTrying to contain the rupee’s fall, it is asking local banks not to create additional positions in the non-deliverable futures market, a move that could lead to spread of offshore volatility. local market, bankers And the merchants said.

Creating positions in this segment of the market is forcing reserve Bank of India To spend more reserve protect Rs.said one of the bankers.

The RBI’s informal communication to local bankers is a step back from the directives issued in June 2020, when it allowed banks to operate from international ones. financial Services Banking Units Center for Doing Business in ndf section.

Central bank move in 2020 Studies have shown that the foreign bank-dominated NDF market, on which the RBI had little influence, fueled volatility and often depreciated the spot rupee in times of stress. Allowing Indian banks to do business in this segment will give more control to the RBI.

However, increased trading in this segment has increased demand for dollars at a time when the spot rupee is already under pressure, forcing the RBI to intervene.

The RBI probably assessed that the NDF was “mitigating the effect of their intervention,” and further increasing liquidity in the market, which both are not wanted. anindya banerjeeHead of Research -Forex and Interest Rates Kotak SecuritiesTold.

Meanwhile, the sharp depreciation of the rupee in the recent past had given rise to opportunities for arbitrage between onshore and offshore rates. Arbitrage drives demand for dollars while providing more liquidity offshore.

For example, the USD/INR NDF 1-month rate is currently 7 paise higher than the respective onshore rate and the 3-month forward rate is about 25 paise higher.

About two weeks ago, the difference was close to 2 paise and 8 paise respectively.

To take advantage of this arbitrage, eligible banks can buy spot dollars onshore and pay 1 month premium while selling 1 month USD/INR in the NDF market.

Bankers argue that RBI’s restrictions on banks’ activities on NDFs will not ease the pressure on the rupee. Instead, it will make offshore rates once again having a greater impact on the rupee exchange rate.

“The problem is that banks have now been asked to step aside, the gap between NDF and onshore will remain,” said a trader at a foreign bank.

Bankers told Reuters that the RBI has banned outright activity on NDFs. Trading forward basis points, or the difference between two maturities, is still permitted.

RBI did not respond to an email seeking comment.