At least seven lenders harness GIFT city facilities


At least seven lenders, including Axis Bank, HDFC Bank, and ICICI Bank, exploit the GIFT city facilities to make a powerful Indian presence in the non-deliverable forward (NDF) currency derivative market.

Non-deliverable forwards (NDF) are cash-settled forward contracts that are not exchanged. The difference between the NDF price and the spot price is the settlement price.

Average daily volumes in over-the-counter trades in the GIFT city increased from USD 1.5-2 billion from USD 100-200 million about a year ago.

The daily-average surge in volumes of OTC non-deliverable forward trades during the onshore time has helped to bridge the gap between the offshore and onshore currency prices bringing stability to the exchange rate.

The gap between one month onshore and offshore forward is less than one paise from four to five paise. A wider gap would encourage arbitrage (purchase and sale of same security from different markets and the difference of price are profits) opportunities that would eventually rise volatility.

The one-month rupee volatility index is at 4.51% as compared to 7.63% a year ago.

Axis Bank IBU branch is playing a remarkable role in the NDF market in GIFT city.

Earlier, RBI was unable to control NDF movements on rupee-dollar. The local banks were not permitted to tap the NDF markets at GIFT. Now, the central bank directs private and public banks to buy and sell NDF units, which is called NDF intervention.

The seven bank lenders, including SBI Bank, Kotak Mahindra Bank, have a full-fledged treasury desk (department of bank managing daily cash flows and liquidity) and robust risk controls. Their participation in this segment will reduce the risk of heightening volatility.

NDF business at GIFT city is an excellent platform to meet global banking needs. The liquidity in the NDF market at the GIFT city has improved significantly with large local banks transacting.

The Indian banks that hold a license to operate in the International Financial Services Center in GIFT city were allowed to participate in the NDF market at GIFT city from 1 June 2020.

The banks are well prepared to meet the challenges related to full capital account convertibility as foreign investors get access to India’s debt market after the global bond index inclusion.

Integration of financial markets is an important aspect of currency convertibility. NDF onshore spreads have narrowed, allowing Indian banks to enter the NDF space.

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