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'NDF sucking out liquidity, need to deepen local forex market'

Last Updated: Friday, September 20, 2013 - 21:34

Mumbai: Domestic forex market needs to be deepened and made more competitive as non-deliverable forwards is sucking out liquidity from the onshore place, increasing the rupee volatility, RBI Governor Rahuram Rajan said Friday.

"To some extent it (NDF) draws away liquidity from our market. We have to make sure we provide deep and functioning market so that there is no need to establish a parallel market outside," Rajan told analysts and researchers at his maiden post-policy conference call this afternoon.

"There is certainly competition for the Indian market and competition generally is a good thing. We should try and deepen our markets to draw in more activity here," the newly appointed Governor said.

The non-deliverable forwards (NDF) market is a foreign exchange derivative instrument traded over-the-counter currencies that are not freely convertible, like the rupee, are traded here.

RBI has no control over this market, which has huge volume and operates round-the-clock. Domestic financial institutions are not allowed to trade in this market.

Rajan said the central bank would look into the problems which market participants have in entering the NDF market but only when the forex market stabilises.

It could be noted that an internal research published in the RBI's annual report had admitted that the NDF market influences the rupee movement.

"We will examine the restrictions that players have in entering and participating in it, but that is something which we have to do once we have stability on the rupee front," Rajan said.

Rajan further said he is comfortable with the current level of the rupee and processes that are put in place to accumulate in forex reserves.

"Remember the FCNR-B as well as the bank capital measures go directly to our forex reserves. But we have to cross the bridge of excess reserves or deficient reserves and how much we want to build up as inflows start picking up.


First Published: Friday, September 20, 2013 - 21:34
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