NDF difference swings as banks stay away from usual forex bets

Mumbai: The difference between the domestic deliverable dollar/rupee forward rate and the overseas non deliverable forwards (NDF) moved widely before settling around Friday's level in a volatile day of trade as lenders tried to adjust to the Reserve Bank of India's (RBI) newly imposed curbs on net open rupee positions. "The difference between the one-month onshore forwards and one- month offshore NDF had risen to about ₹1.35 in the early part of trade as market participants expected banks to sell dollar in the local spot market and buy NDF overseas in light of the RBI restrictions," a top treasury official said, on the condition of anonymity.

"But banks mostly stayed on the sidelines on expectations that there could be some relief from the RBI, which explains why the difference between one month onshore forwards and offshore NDF came down to about 40 paise. That is very close to where it ended on Friday," said the official cited above.

Late on Friday, the RBI had asked banks to cap their net open rupee positions in the onshore deliverable market to $100 million at the end of each business day effective April 10, far lower than the 25% of total capital limits allowed earlier.


The rupee opened sharply higher in the spot market touching a high of ₹93.58 per dollar from Friday's close of ₹94.81 per dollar. However, year-end demand from companies and reluctance by banks to take a position after the RBI direction led to the rupee weakening to ₹95.22 per dollar, an all-time low.

"In the overseas NDF market, banks also got into deals with their corporate customers to reduce their losses, selling in the NDF market to corporates who got a good deal expecting the rupee to weaken further. This was also a reason that the onshore-offshore arbitrage came down," said another senior bank treasury official.

Although the difference in the shorter tenure of the local forwards and overseas NDF came down, it rose in the longer tenure NDF because traders now expect the dollar to strengthen further in the medium to long term.

"In applying a restriction for banks, the RBI had inadvertently tied down the market and made it one-sided. When banks unwind their positions abroad by buying short term NDF dollars, it gives an opportunity for hedge funds and speculators to sell at a higher rate, giving them an easy exit. Banks have been now tied down in the market because RBI restrictions do not allow them to carry forward their trading positions so many of the local banks were on the side lines which means liquidity was thin," said another treasury official.

Bank officials are wary of speaking on record for fear that it may earn the ire of the regulator. Banks use the overseas NDF market as a hedge to their local trading positions.

For instance, a $10 million dollar purchase in India could be hedged by selling dollars in the NDF market in the future, which meant the bank in question had no open position to speak of. With the RBI putting a $100 million daily cap for overnight onshore positions, banks will no longer be able to net off these trades with the offshore NDF and are looking to minimise their losses through deals with clients or other overseas funds.