In a bid to develop a deep and liquid onshore foreign exchange market, a Reserve Bank of India (RBI) panel has recommended that onshore market hours may be suitably extended to match the flexibility provided by the offshore market. This is aimed at incentivising non-residents to hedge in the onshore market.

The Task Force on Offshore Rupee Markets, headed by Usha Thorat, former RBI Deputy Governor, was constituted in view of the sharp growth in offshore trading volumes in the rupee non-deliverable forward (NDF) market in recent years, likely even beyond the volumes in the onshore markets.

This raised concerns around the forces that are determining the value of the rupee and the ability of authorities to ensure currency stability.

Offshore markets, usually referred to as NDF markets, enable trading of the non-convertible currency outside the influence of the domestic authorities. These contracts are settled in a convertible currency, usually US dollars, as the non-convertible currency cannot be delivered offshore.

The panel suggested that banks may be allowed to freely offer prices to non-residents at all times, out of their Indian books, either by a domestic sales team, or by using staff located at overseas branches.

It recommended that non-deliverable rupee derivatives (with settlement in foreign currency) may be allowed to be traded in the International Financial Services Centre (IFSC), and IFSC Banking Units may be allowed to deal in such derivatives with a distinct foreign currency-Indian rupee (INR) position limit.

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