The rupee, India’s national currency was once a very popular trading asset in India. Though London, Singapore, and some other megalopolises have already overtaken the lead trading position from India. As far as London does more rupee trading than Mumbai and the very moment, makes Indian authorities take steps to get foreigners to trade onshore.
This is definitely not the easiest job to do, and definitely will not be easy to accomplish for the Indians. So far, the good reason for market participants to switch from excellent global trading hubs such as Singapore or London to Mumbai simply does not exist. The comments have been made by the industry experts and analysts.
Jeffrey Halley, who is the senior market analyst at Oanda Asia Pacific, talks about the potential difficulty with switching to the Mumbai trading market. He also mentions that there is a need to add more counterparties to increase investors’ trading costs. Currently, the authorities are more than concerned by the surge in rupee trading overseas. The main reason for concern is the potential threat to the stability of the currency, especially when the global pandemic has caused the economic crisis.
The concerns were especially pointed out after London overtook the Mumbai trade market topping the trading center. In response, Inia has been moving to make its onshore market more attractive and appealing to replicate offshore centers in specially designated financial zones within the country.
Again, going back to Halley, for his this definitely looks like fighting the waves. In his interview, he mentions that the institutions have all the access to a Michelin 3-star menu of the currencies from all over the world all in one center. The hubs like Singapore and London are the perfect example for that.
The banks should have no incentive from a purely cost basis alone, to set up a separate operation onshore. At issue is the rise of derivatives known as non-deliverable forwards, bets on the direction of a currency made in the offshore center, beyond the rules of domestic authorities and without the need to deliver the currency itself. The contracts, which allow the investors to hedge, arbitrage, and speculate in non-convertible currencies such as the rupee, can be traced back to the previous century.
London has become the biggest center for trading the Indian currency, which is determined by several reasons. It is not very often that a completely different nationality and far away country is more popular with trading your currency than the local country itself. The report was published by the Bank of International Settlements back in September. On average, the daily volume for the rupee in the UK has jumped to $46.8 billion in April, which was significantly higher than in India, which was only $34.5 billion at that time. The volumes simultaneously increased in Singapore, Dubai, and New York.
“It will be a better world for us if there is no NDF market, but we cannot wish it away,” former Reserve Bank of India chief Duvvuri Subbarao famously said during the US taper tantrum of 2013 when the Indian currency was plummeting to record lows on an almost daily basis, with NDFs blamed for a surge in speculative trading.
In the report from July month, the Reserve Bank of India (RBI) task force on offshore rupee markets recommended getting back to the onshore markets by extending trading hours and allowing the local banks to offer price quotes to foreigners the whole day. It also said that non-deliverable forwards trading should be permitted in special centers within India that would replicate the attractiveness of the offshore locations.
According to this scheme, the RBI stated that this would allow rupee trading by customers outside of the domestic jurisdiction in low-tax venues. Moreover, the International Financial Services Center in the Gujarat International Finance Tec-City, or also known as GIFT City, an effort by Prime Minister Narendra Modi to replicate the market in Singapore, is awaiting regulatory approvals, before even becoming the country’s one and only NFD rupee contract venue.
Forex trading is another popular activity in India. It is one of the activities which rose in value, unlike the rupee. The reason for the increased interest in Forex trading is the open opportunity hub in the local market. The forex market is one of the best side income opportunities. Especially when the Indian Tech hub is enhancing and is becoming more and more popular, the FX market is increasing relevantly.
Though, when the volume of the rupee increased on the international market level the FX became a skeptical asset to invest in. Especially when traders are in charge of paying tax on Forex trading in India, it is less likely that the industry representatives are going to make anything relatively more attractive to the potential customers. Paying a lot of taxes, when the market is highly volatile and risky, is an additional reason for many people to stay away from trading.
In the existing onshore over-the-counter market, foreigners are allowed to hedge only on the basis of their underlying exposure. They can only enter into plain vanilla forwards and options contracts and are generally not allowed to rebook a contract once canceled.
The senior investment director at Schroder Investment Management in Singapore, Manu George, outlined in his comment that it is difficult to see a situation where offshore trading migrates to within the Indian border.
“India is not a major FX trading hub and so it’s inefficient from a firm’s point of view as there are more counterparties to generally trade FX than onshore in India,” he said. “Adding further counterparties adds to the cost and expense of setup and trading.”
Investors have been “a bit disappointed with frequently changing regulations, which keep them perpetually nervous about whether the assumptions they made before coming to India are indeed going to hold,” she said at an event at the GIFT City in August discussing ways to bring rupee trading onshore.
Still, much more must be done, according to Sanjay Guglani, chief executive officer at Silverdale Capital Pte Ltd., a Singapore-based fund manager who manages about $1 billion of assets.