MUMBAI: Reserve Bank of India (RBI) has for the first time attributed volatility in the exchange rate to speculative activities in the non-deliverable forward (NDF) market and in the market for currency futures. While currency futures are traded in stock exchanges, non-deliverable forwards are transactions where multinational banks bet on the rupee overseas through forward contracts that are settled in dollars.
For a long time, RBI had not even acknowledged the existence of the NDF market. This was because these contracts were earlier seen as esoteric transactions, justified on the grounds that clients required options to hedge against currency risks. But of late, the NDF market has grown in size and RBI has been suspecting that speculation in overseas markets is actually influencing domestic rates.
According to RBI, speculation in the NDF markets for the rupee is now exerting an increased influence in domestic currency markets through spillover effects. Studies have shown that, during times of appreciation, both the spot market in India and the NDF market influence one another. But when the rupee is weakening, it is largely the local spot market that is influenced by bets made overseas. This has proved to be a big headache for RBI as, while it can influence local markets through intervention, it has no control over the NDF market.
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