Shyamala Gopinath,deputy governor of the Reserve Bank of India, has said that the central bank would be open to ideas on allowing offshore parties to hedge rupee exposure onshore, but spurned the notion of opening an onshore non-deliverable forward market.
It is argued that rupee [trade] invoicing may be a preferred option to help domestic exporters and importers to deal with currency volatility, he said in a speech, but acknowledged that few offshore counterparties would be willing to do this without a hedging mechanism. The RBI is willing to examine this and I would urge [the Foreign Exchange Dealers Association of India] to come up with feasible suggestions in this regard.
He said many had brought up the idea that opening an onshore NDF market would allow for this opportunity and capture capital being pushed out of the country by restrictions on onshore fx options. It has been argued that in todays financial world of complex derivatives, it is really not possible to have restrictive policies for flow of capital, he said. The significant increase in the NDF volumes involving INR is a case in point.
He noted that restrictions on onshore fx derivatives could simply push the speculative players into the NDF market, but implied bringing it onshore would do more harm than good. This would essentially imply permitting non-residents access to domestic markets irrespective of whether they have underlying exposures to domestic markets or not, he said. In other words allow them to trade foreign exchange involving the rupee as a separate asset class. He said this could open the foreign exchange market to excessive volatility and speculative trading.