RBI's wider NDF access may require foreign exposure proof: Bankers

 Mumbai, April 25, 2023

Indian residents will likely need to provide proof of exposure to foreign exchange risks to take advantage of the Reserve Bank of India's opening up of the non-deliverable forward market (NDF), bankers said.

The Reserve Bank of India, while announcing its last policy decision, said it will permit banks with IFSC banking units to offer non-deliverable forex derivative contracts involving the Indian rupee to local residents.

An IFSC Banking Unit or "IBU" is a bank permitted by the Reserve Bank of India to operate from an International Financial Services Centre (IFSC).

Previously, IFSC banking units were permitted to transact in rupee NDF forex derivatives contracts only with non-residents and with other eligible banks. A non-deliverable forward is a contract that is settled without delivery of the rupee.

The RBI will set out guidelines for the new NDF framework, clarifying whether residents have to provide proof of exposure to foreign exchange.

"Reckon the same conditions that exist currently for hedging in the OTC (over-the-counter) will apply to NDF," said V. Lakshmanan, head of treasury at Federal Bank.

"RBI in my view will not want to create a differentiated access to one instrument compared to another which is in existence."

As per the RBI's existing guidelines, evidence of forex exposure needs to be submitted to banks to access the OTC market.

"It is difficult to see RBI dispensing with the exposure requirement," a senior treasury official at a public sector bank said.

"The idea behind broadening NDF access is to make way for a market that is available beyond OTC hours and provide more flexibility with hedging. Continuing with the exposure requirement will not impact either."

Further, the exposure requirement will discourage "outright" currency speculation and impact volumes "at the margin," the official said.

[Reuters]