'Offshore trading in Re affects local spot rates’

Rupee bets in the overseas currency markets like Singapore and Dubai influence the domestic currency levels, especially when the rupee is losing ground to the dollar. A study by RBI concludes that there’s a strong co-relation between movements in the non deliverable forward ( NDF) market — the offshore trading in rupee — and the Indian spot rupee, which is the local market, particularly when the domestic currency is under pressure.

The recent LIBOR rigging scandal has raised concerns about the transparency in operations in NDF contracts in overseas markets. It was perceived that entities interested in local currency could have influenced spot rates in order to make gains while settling NDFs.

Non-Deliverable Forwards are foreign exchange forward contracts traded in the over-the-counter market at offshore destinations, generally major international financial centres. Most popular offshore centres are Singapore, Dubai, London and Hong Kong, among others.

The research paper written by Rajan Goyal, Rajeev Jain and Soumasree Tewari of RBI’s department of economic analysis and planning finds that during the period of rupee depreciation, only spot and forward (onshore) markets responded to deviations from long-term equilibrium levels of the currency, while in the period of rupee appreciation, onshore and offshore markets adjusted towards long-term equilibrium levels of the currency.

The paper explains the rationale behind the behaviour of currency markets and the authors say the asymmetric behaviour of spot/forward and NDF markets could be attributed to the fact that during the period of rupee depreciation, RBI tries to contain volatility in forex market.