The Reserve Bank of India allowed offshore units of Indian banks to participate in the offshore rupee derivative market to curtail volatility in currency markets due to the Covid-19 pandemic. 

  • Significance: It can be noted that the ongoing financial market volatilities triggered by coronavirus outbreak dragged the rupee to touch lifetime lows and also breach the 75-mark against the US dollar 
  • In the past, experts have expressed concern about the Non-Deliverable Forward (NDF) market - till now inaccessible to Indian banks - as among the measures which drive the rupee movement.

About offshore currency derivative market: One can buy and sell currencies at different prices depending on where the trading is taking place. These markets are basically of two types- Onshore and Offshore.


Onshore currency derivative market

Offshore currency derivative market

What is

‘Onshore’ currencies mean buying the currencies locally within a country’s boundaries.

Offshore currencies mean buying the currencies outside the national boundaries of a country.

Controlled by

Onshore rates are controlled by the central bank.

  • For the Indian Rupee, onshore trading is controlled by the RBI, but RBI has no control over offshore trading of the Rupee.

Offshore rates are decided almost entirely by Foreign exchange markets. 

Why is there a divergence between onshore and offshore market?

The onshore markets are controlled by central banks. 

The offshore markets move in response to expectations of market participants.

How trading happens

If you trade currency futures on the NSE or BSE or if you buy a forward cover from a bank in India to cover risk, it is basically an onshore market.

The only way to take a buy or sell position in the offshore market is through NDFs (non-deliverable forwards) and other derivatives.

Parameters of trading

Standard onshore forward exchange contracts are priced based on interest rate parity calculations (interest rate differential and current spot exchange rate).

NDF markets also factor in other parameters like volume of trade flows, liquidity conditions, and counterparty.

About non-deliverable forward (NDF)

  • It is a foreign exchange derivatives contract whereby two parties agree to exchange cash at a given spot rate on a future date. The contract is settled in a widely traded currency, such as the US dollar, rather than the original currency.
  • An NDF contract is similar to a regular forward foreign exchange contract but does not need physical delivery of currencies at the time of maturity. 


  • These are outside the purview of the RBI and SEBI: Since currencies are traded in pairs, for instance dollar-rupee, euro-rupee, yen-rupee, etc., these trades are beyond regulatory purview if conducted on foreign soil.
    • A large offshore market, on which the RBI has no control, is clearly not desirable as the central bank’s attempts to manage the currency in volatile times are likely to be thwarted by traders overseas.
  • These offshore markets also eat away a chunk of the onshore currency volumes. That is because; large traders and investors prefer to hedge their risk in the offshore markets considering that they are less regulated and the costs are much lower.

Why is there a shift of currency from onshore to offshore?

  • As per the Usha Thorat Task force report, the growth in offshore trading in rupee was prompted by a variety of reasons, including 
    • restrictions in participation of non-residents in domestic markets, 
    • non-convertibility in the capital account, 
    • limited time of operations of domestic exchanges and a booming underlying economy.
  • As the number of foreign investors in the economy grew, their need to hedge their exposure has led to growth in these offshore centres, given the issues in the domestic markets. 
  • Growing speculative interest in the rupee, due to the fast-paced growth of the economy, is another reason behind the thriving trading in rupee overseas.
  • The NDF markets are less regulated in terms of disclosures and limits.
  • The NDF market is denominated in US dollars and that makes it a lot more convenient for global investors whose investment returns are typically measured in dollar terms.

Currency derivatives are exchange-based futures and options contracts that allow one to hedge against currency movements. 

Hedging: Simply put, one can use a currency futures contract to exchange one currency for another at a future date at a price decided on the day of the purchase of the contract.

RBI initiatives to control the offshore markets

  • Banks in India which operate International Financial Services Centre (IFSC) Banking Units (IBUs) are being allowed to participate in the NDF market with effect from June 1, 202.
  • In January, authorised dealer banks were allowed “to offer foreign exchange prices to users at all times, out of their Indian books, either by a domestic sales team or through their overseas branches.
  • Task force, chaired by Usha Thorat, on offshore rupee markets had emphasised the need to limit impact of the non-deliverable forwards market on the onshore market and curb volatility in the foreign exchange rate. 
  • The RBI recently made two policy changes based on the recommendations of a task force headed by Usha Thorat. 
    • One, it has now allowed domestic banks to freely share foreign exchange rates with non-residents 
    • Trading in rupee derivatives has now been allowed on International Financial Services Centres.

What are the advantages of RBI’s recent move?

  • It will augment liquidity in NDF and this gives an opportunity to the RBI to intervene in the NDF market, which has caused considerable volatility in the past on local exchange rate.
  • The NDF move makes sense only if the said Indian banks sell dollars when overseas participants are buying during Non-Indian time of the market. 
  • If the speculators are aware that the RBI is ready to intervene with $1 billion or more, then nobody will dare to take positions.
  • The central bank intervenes through a clutch of nationalised banks. Now it can have its influence overseas as well, in unregulated markets that operate from Dubai, New York, Singapore, and Hong Kong.

Way forward

  • Introducing exchange traded rupee contracts in the GIFT IFSC: Since the trading hours of the GIFT exchanges are longer, up to 15 hours, and can be extended if required, the traders who wish to trade alongside other markets can use the GIFT exchanges.
  • Implementing Usha Thorat Task force recommendation: A better way to curtail overseas trading in rupee would be to address the problems in rupee trading on domestic platforms. 
    • Some of the recommendations of the task force such as increasing the position limits allowed to users on onshore markets, without an underlying, can help towards this end.
    • Other recommendations such as setting up a central clearing and settlement mechanism for non-residents’ deals in the onshore market and wider access to FX-Retail trading platforms to non-residents can also help boost non-resident participation in the domestic market.
  • Internationalising the rupee: China was able to move offshore trades to the domestic market by increasing the internationalisation of the Chinese yuan. While the usage of the rupee is quite low in global trades, it can be increased if the sovereign bond issuances overseas take off. 

About the Usha Thorat Task Force on Offshore Rupee Markets, set up by the RBI 

  • The panel examined the causes of the underlying growth in the overseas NDF markets and identification of measures to reverse the trend.

Panel’s recommendations:

  • The task force has proposed rupee derivatives (settled in foreign currency) to be traded in the International Financial Services Centers (IFSC) in India, to begin with on exchanges in the IFSC. 
  • It proposed allowing users to undertake forex transactions up to $100 million in the OTC currency derivative market without the need to establish underlying exposure.
  • It has also mooted facilities for non-residents to hedge their foreign exchange exposure onshore by establishing a central clearing and settlement mechanism for non-resident transactions in the onshore market and implementing margin requirements for non-centrally cleared OTC derivatives and allowing Indian banks to post margins abroad. 
  • Other proposals include aligning the tax treatment of foreign exchange derivatives with that in major international centres and centralising the KYC requirements across financial markets with uniform documentation requirements.

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