Offshore markets affecting rupee fluctuations

The RBI stated in its annual report that the Non-Deliverable Forwards (NDF) markets are exerting more pressure on the onshore currency market, especially when rupee is under stress.

 The rupee has nearly declined 21 % so far this fiscal. As per RBI, during the period of the rupee fall the shocks originating in the NDF market may carry more information which is mirrored in the onshore segments of the market through mean and volatility spill over.

It further says that during the period of the rupee appreciation the NDF market and the rupee spot market exhibit a bi-directional relationship. However at times of rupee fall relationship turns unidirectional from the NDF to onshore market.

What is NDF (Non-Deliverable Forwards)?

Non-Deliverable Forwards (NDF) is a foreign exchange derivative instrument traded over the counter and is operated in currencies that are not freely convertible such as the rupee. The market enables hedging of exchange rate risks irrespective of any restrictions arising in the currency of origin.

Month: Current Affairs - August, 2013