News — ChangeLab

India announces measures to expand foreign exchange market opportunities with onshore NDFs

Last week, India announced an expansion of its foreign exchange market with special measures to allow residents and local banks to trade foreign exchange derivatives, which are popular in the offshore market. Moreover, the Reserve Bank of India (RBI) is proposing to allow banks affiliated with the International Financial Services Centre (IFSC) to offer direct forward forex contracts (NDF) that include the Indian rupee, allowing banks to offer their customers enhanced currency hedging options.

Prior to this decision, Indian banks were allowed to enter into NDFs in rupees with non-residents and other eligible foreign banks. Now the Government of India's inclusion of local lenders in NDFs indicates that India continues to finance its economy, which is manifested in the predominance of financial transactions in the overall structure of domestic and international relations.

In our opinion, this step will contribute to the fact that banks will have the flexibility to settle their transactions with non-residents and with each other both in dollars and in rupees. At the same time, transactions with residents would continue to be conducted in local currency. Thus, despite the fact that the RBI reported a sharp pressure on the Indian currency in late 2022, all the above measures will significantly strengthen the onshore/offshore market and help stabilize the USD/INR pair. Our analysts are also confident that the result of these measures in the Indian economy will be improved pricing practices in India, attracting offshore volumes to the country, and developing opportunities for residents to hedge their balance sheets.