Now, the Reserve Bank of India (RBI) wants to know all about them under a proposed rule that most foreign banks operating in India are resisting.
Why? First, they do not have access to information on offshore deals that are difficult to track across geographies; second, there could be issues around jurisdiction – how much data of transactions in other parts of the world can be shared with authorities in India.
DETAILS & HURDLES
Say, a Wall Street fund taking a short position in rupee, backed by a view that the Indian currency would dip, enters into a derivative contract with Citi New York. Or, a British MNC with operations here, cuts a similar deal with HSBC London.
Such derivatives, used to trade non-convertible currencies, flourish in the non-deliverable forward (NDF) market of London, New York, Singapore, Hong Kong, and even Dubai.
Neither Citi India nor HSBC India may be aware of the deals that treasuries of their banks in various foreign markets have struck. However, in a draft rule RBI has proposed that foreign banks in India, which are regulated by Indian central bank, would disclose NDF deal specifics – the notional value, counterparty’s name, maturity date, etc. The data would be shared with the Clearing Corporation of India Ltd (CCIL) which clears and settles GoI bonds, derivatives, and money market and forex deals.
The regulatory intent is clear. A granular visibility of what’s playing out in the NDF market could improve RBI’s ability to intervene in onshore as well as in the NDF market to curb rupee’s volatility or arrest a sudden decline or surge.
“This looks difficult. It’s impossible to track NDF deals linked to the rupee or rupee interest rate happening across markets. Unless, a foreign bank’s Indian branch is participating, there is no rule or mechanism to exchange such information. Also, there are restrictions in various markets against freely sharing information with a foreign clearing house. It could require approval of the home country regulator, just as a decision to share certain information on Indian transactions with a foreign authority has to be cleared with RBI,” said a senior banker.
Some MNC banks are meeting RBI to spell out the difficulties. One can try to the extent possible but holding Indian offices of foreign banks responsible for collating and sharing all NDF detail data on the same day or within two working days can be onerous, even impossible, said another person.
Sharing with CCIL, said a currency dealer, may also require consent of the overseas client in the NDF market.
NATURE OF MARKET
In arbitrage deals, where banks cash in on price difference prevailing in INR-USD forward in the onshore market in India and NDF market, the bank in India, participating in one leg of the transaction, would obviously know about the other leg in the NDF market. However, when the deal is between a bank and client, both of which are located abroad, information on the NDF deal would not be readily available to that bank’s India office.
According to market sources, while RBI may be keen to put in place an information-gathering framework, the move was probably promoted after a large Asian primary dealer agreed to share information on NDF rupee interest rate derivatives (IDR) on a fortnightly basis. “The IDR-NDF market is a fraction of the forex NDF market. RBI’s real interest would lie in accessing in currency NDF data,” said a banker.
While Indian banks like SBI and ICICI which have foreign branches may be willing to share data, foreign banks are reluctant.
In the NDF market, as the name suggests, rupee is not ‘delivered’ abroad. Instead, NDF contracts are settled usually in USD, based on the difference between agreed rate and spot rate at maturity. If rupee falls, a foreign portfolio investor (FPI) holding stocks in India may hedge currency loss by shorting the rupee. On several occasions, it may just speculate without having any real exposure if it has a view that hardening oil price and currency account deficit could impact the INR. Such deals may widen the gap between onshore and NDF (or offshore market), causing a bank (or a large corporate) to buy in India and sell in NDF. Such buying pushes up the dollar as the impact of NDF deals spills over in the Indian market.
The RBI spokeperson did not comment on the matter.