Indian banks were not permitted to participate in this market, although the benefits of their participation in the NDF market have been widely recognized, the central bank stated. NDF markets enable trading of the non-convertible currency, like a rupee, outside the influence of the domestic authorities. For instance, trading in rupee NDF takes place in Singapore, Hong Kong, Dubai, London, and New York markets. These contracts are settled in a convertible currency, usually US dollars.
The Reserve Bank of India (RBI) permitted banks in India, which operate International Financial Services Centre Banking Units (IBUs), to participate in the non-deliverable forwards (NDF) market with effect from June 1.
Banks may participate through their branches in India, their foreign branches, or their IBUs. In consideration of the risk that participation of Indian banks may improve liquidity in the offshore market and undermine the development of the onshore market, the task force is of the view that Indian banks should not be permitted to deal in the offshore rupee market.
IFSC has the potential of providing certain benefits to India and therefore a distinction could be made between the two while examining the case of permitting rupee derivatives to be traded in the IFSC. The participation by Indian banks in the NDF market will help increase arbitrage trades, thereby reducing the spread between the onshore rupee forwards as well as the NDF.