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Informist, Wednesday, Sept. 24, 2025

 

By Aaryan Khanna

 

NEW DELHI – The Reserve Bank of India's unshackling of the rupee non-deliverable derivative contracts comes at the behest of primary dealerships backed by global financial institutions, according to senior treasury officials from primary dealerships. The move is unlikely to spur activity from domestic entities, either in the new contracts or in the foreign exchange market, the institutions affected by the change in regulation said.

 

"This opens the door for standalone primary dealers in two significant markets: non-deliverable FX forwards and non-deliverable OIS (overnight indexed swaps)," said Vijay Sharma, senior executive vice-president at PNB Gilts Ltd. "They will definitely be looking to make use of the opportunity where applicable for primary dealers, which looks to be first in the non-deliverable OIS segment."

 

Non-deliverable derivative markets are offshore markets that enable trading of the non-convertible currency outside the influence of the domestic authorities. These contracts are settled in a convertible currency, usually US dollars, as the non-convertible currency cannot be delivered offshore. In October 2022, the RBI had allowed India's seven standalone primary dealers to engage in foreign exchange operations, but they were not allowed to deal in the non-deliverable derivatives market.

 

Domestic entities are less likely to benefit or embrace the new opportunity, having a smaller pool of foreign portfolio investors as clients for the rupee NDF market. Only ICICI Securities Primary Dealership Ltd. has begun foreign exchange operations while the other three - PNB Gilts, STCI Primary Dealer Ltd., and SBI DFHI Ltd. – have not yet begun since the mandate was given, officials said. At least one of the domestic primary dealerships has so far not received the Authorised Dealer-III license from the RBI, officials said.

 

The new rules are unlikely to spur the domestic entities into action. The "arbitrage" opportunities between onshore dollar-rupee forwards and OIS markets and their offshore counterparts is minuscule at best on most days. Non-deliverable contracts also pose several operational issues for these institutions as the deals will be struck in foreign jurisdictions, with tax and legal blind spots for these domestic facing entities. Compounding these is the lack of trained personnel, especially for the NDF market, and a large investment on training such personnel is not expected to return much even in the medium-term, officials said.

 

"We are just in the stage of initially exploring foreign exchange operations," a senior official at another domestic standalone primary dealer said. "For these non-deliverable contracts, the taxation issues are a big complication that will come up and where we're not comfortable. Plus, the new markets don't offer much in terms of profitability and there is not much client demand, for us at least."

 

The RBI Monday allowed standalone primary dealers to offer non-deliverable derivative contracts in the rupee. Earlier, these were restricted to banks having branches in the International Financial Services Centre at Gujarat International Finance Tec-City. The allowance is only for primary dealers having Authorised Dealer Category–III licences, which allow offering all foreign exchange market-making facilities on par with Authorised Dealer Category-I entities. Some have sought clarification whether they can enter these trades from current branches or if they too need to set up branches in GIFT City, officials said.

 

The three standalone primary dealers with foreign backing – Nomura Fixed Income Securities Ltd., Goldman Sachs (India) Capital Markets Pvt. Ltd., and Morgan Stanley India Primary Dealer Pvt. Ltd. – are expected to jump on the opportunity due to their foreign investor client base, multiple treasury officials said. All three are said to have begun foreign exchange operations for clients, and already trade in the two segments from branches outside India.

 

The change in rule will help onshore some market activity taking place in offshore financial centres such as Singapore and offer quotes to clients from Mumbai beyond Indian market hours, officials said. However, offshore centres will continue to be the hub for these trades as the entry of Indian banks into the markets at GIFT City and in Mumbai branches has not materially reduced the volume of transactions offshore, they said.

 

"These are the two big markets that it opens. The deregulation push has been initiated by all the foreign PDs (primary dealers) to better consolidate client needs directly rather than farm it to another branch or a competitor," a senior official at a foreign-backed standalone primary dealer said on condition of anonymity. "The processes will take maybe two or three months to set up and get approved, but otherwise, it shouldn't be a problem to begin these operations."

All in all, the RBI's deregulation push is a welcome step for one half of the market, which had been waiting for the opportunity. It is business as usual for the other segment, happy to have the trick up their sleeve if they need it, but more focussed on their market making activities in the fixed income segment.  End

 

Edited by Ashish Shirke

 

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