The rupee would continue to be more vulnerable to global risks as the depth of the offshore non-deliverable forwards market increases over time, according to a study by the Reserve Bank of India (RBI).
The internal staff study has found empirical evidence that the offshore non-deliverable forwards (NDF) market for dollar/rupee puts undue pressure on the onshore Indian rupee during periods of depreciation.
?Even though both onshore and offshore segments follow an equilibrium relationship in the long run, movements in the NDF market seem to drive adjustment in the onshore market when rupee faces downward pressure,? the study said.
In the aftermath of the rupee?s sharp plunge to lifetime lows earlier this year, the NDF market had come into the regulator?s glare as large speculative positions taken by market participants involving transactions in the NDF and counter-positions in the onshore market were said to be driving the rupee?s depreciation.
When the rupee fell to its all-time low of 68.85/$ in August, NDF contracts had already predicted the currency?s fall a month in advance.
The central bank also took measures to curb the speculative activity by limiting trading capacity of banks and companies in dollar/rupee futures as well as forwards.
The staff study, using statistical models, showed that although offshore and onshore markets co-move in the long run, the behaviour is different during periods of stress.
During times of appreciation, the influence of the NDF market is minimal and, at times, the onshore market impacts the NDF rates. However, the NDF market puts excess pressure on the onshore spot dollar/rupee during periods of depreciation.
The study also said that the RBI?s measures may have prompted market participants to seek greater flexibility in punting offshore.
In the past, the RBI had taken various measures to curb speculation. In December 2011, the central bank had banned companies from cancelling and rebooking forward contracts. Even foreign investors were disallowed to do so. These measures may have added to the NDF market volume, the study said.
