Shoring Up Onshore

The Reserve Bank task force's suggestions to curb growing volumes of dollar-rupee trades in offshore market have come at an apt time, as the rupee has been under pressure due to the US-China trade war. Often in the past, the offshore market - also called the non-deliverable forward (NDF) market - has influenced onshore spot price during uncertain times when overseas investors tend to speculate and make arbitrage gains on the price differential. The report cites two instances - the taper tantrum in 2013 and the 2018 emerging market turmoil - when the NDF market had driven down the onshore rupee value, hurting the RBI's efforts to curb volatility and support real price discovery.

Currency gyrations could be fatal for India, more so if the government goes ahead with issuing sovereign bonds overseas. The RBI committee's suggestions include extending domestic market timings beyond eight hours (NDF works 24/7), allowing banks to offer prices to global clients round the clock, making KYC norms common across financial market segments and aligning taxes with international centres. While most suggestions make sense, the crux lies in rationalising taxation and increasing liquidity on a par with the offshore market.