By Nimesh Vora
MUMBAI (Reuters) – Volumes on rupee non-deliverable forex derivatives have failed to pick up due to arbitrage opportunities and operational challenges, more than a month after the Indian central bank allowed banks to offer such derivatives to local clients.
Since the Reserve Bank of India’s move in early June, the segment has managed to rack up volumes of only about $300 million, according to the Clearing Corporation of India’s data, which bankers have said is very low compared to what they had expected.
Volumes have not picked up because “the onshore and non deliverable forward (NDF) prices are almost the same,” V. Lakshmanan, head of treasury at Federal Bank, said.
“A resident who is well set with onshore will continue with the same.”
A high risk tolerance environment is keeping onshore and NDF forward points almost aligned. During periods of risk aversion, NDF forward points are usually higher than those onshore, creating arbitrage opportunities.
Last year in October 1-year NDF points were almost 80 paisa to 90 paisa higher than onshore points amid worries over the U.S. Federal Reserve’s interest rate outlook. The difference is of 2 paisa to 3 paisa currently.
Operational issues and low volatility on the rupee were also impacting volumes, bankers said.
“Companies will have to integrate exposure to NDF into their risk management systems and may need additional approvals,” a head of forex sales at a private sector bank, who did not want to be named on account of him not being authorised to speak to media, said.
The rupee’s current low sensitivity to broad dollar moves “makes it a bit unnecessary” to hedge beyond the normal onshore trading hours, he added.
However, he said that interest among corporates in NDF “was definitely there” and he expected volumes to pick up at least in swaps and options if not in outright forwards.
Rupee implied volatility on NDF is higher than in the onshore market, meaning companies may see more value in executing some option structures or a part of the structure in the NDF.
“In case of structures like range forwards, it may be beneficial to execute the leg involving buying volatility onshore and execute the leg that involves selling volatility in NDF,” Abhishek Goenka, CEO at forex risk management firm IFA Global, said.
(Reporting by Nimesh Vora)
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