Usha Thorat panel suggests liberal currency market for offshore users

Kolkata: A liberal currency trading regime that would include permitting $100 million Over The Counter trades without underlying exposure, aligning tax treatment with global standards, and extend trading hours to enable overseas investors to trade are among the recommendations by a Reserve Bank of India appointed task force headed by former deputy governor Usha Thorat.

The offshore rupee market has been making a larger impact on the local currency market helping with better price discovery and driving volatility, prompting RBI to look for ways to ensure greater stability for the rupee.



It has been observed that during the last two stress episodes -- the taper tantrum and the 2018 emerging markets crisis -- the non deliverable forward (NDF) market had driven onshore exchange rate more prominently than ever. “As NDF volumes have increased, they have begun to play an important role in both price discovery and driving volatility, particularly during heightened uncertainty period,” the task force said.

“Large volumes in the offshore market reflect the fact that the interest in rupee is far larger than what is evident in onshore currency markets. This reflects the growing size of the Indian economy, greater role of India in the global economy and growth in trade and capital flows.”

In London, the average daily NDF turnover surged to $139 billion in October 2018 from as low as $21 billion in 2008.

“Over time, therefore, it would be imperative for the Indian regulators to take steps to expand the role of onshore currency markets gradually, lest the disjointed price discovery issue flares up more frequently and in larger degrees,” said the panel, which submitted its report last month.

It has suggested extended trading hours to improve access of overseas users and allow Indian banks to freely offer prices to global clients around the clock.

It is also in favour of allowing users to undertake forex transactions up to $100 million in OTC currency derivative market without the need to establish underlying exposure as RBI wished to attract non-residents to access the onshore foreign exchange market more.

At present, they can enter into only plain vanilla forwards and option contracts in the OTC foreign exchange market at present. Non-residents who prefer to express their hedge using structured options necessarily need to execute in the offshore market as current regulations do not allow nonresidents to enter into structured options.

RBI has invited comments on the report by August 31 from every stakeholder.