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RBI asks banks to stop building rupee offshore market positions

October 13, 2022

RBI asks banks to stop building rupee offshore market positions
The Reserve Bank of India, seeking to arrest the rupee’s slide, is asking local banks to not build additional positions in the non-deliverable forward market, a move that could lead to offshore volatility spilling into local markets, bankers and traders said.

The build-up of positions in this segment of the market is forcing the RBI to spend more reserves to defend the rupee, one of the bankers said.

The RBI’s informal communication to local bankers is a step back from the directions it issued in June 2020, when it allowed banks operating from the International Financial Services Centre Banking Units to trade in the NDF segment.

The central bank’s move in 2020 came after studies showed that the foreign bank-dominated NDF market, over which the RBI had little influence, fuelled volatility and often led the spot rupee lower in times of stress. Letting Indian banks trade in the segment would give RBI more control.

However, increased trading in the segment has created elevated demand for dollars at a time when the spot rupee is already under pressure, forcing RBI to intervene.

The RBI had probably assessed that the NDF was “nullifying the impact of their intervention,” and was increasing liquidity in the forward market, both of which it does not want. Anindya Banerjee, head of research -forex and interest rates at Kotak Securities, said.

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