Benefits of Developing Rupee Derivatives in IFSC Opportunities, Benefits & Challenges (An Exploratory Study for IFSC, India)

Offshore markets in a non-convertible currency, usually referred to as non-deliverable forward (NDF) markets, 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. Historically, NDF markets evolved for currencies with foreign exchange convertibility restrictions and controlled access for non-residents, beginning with countries in South America like Mexico and Brazil and thereafter moving on to emerging Asian economies, viz., Taiwan, South Korea, Indonesia, India, China, Philippines, etc. The sharp growth in the offshore trading volumes in the Rupee NDF market in recent years, even beyond the volumes in the onshore markets have raised concerns around the forces that are determining the value of the rupee and the ability of authorities to ensure currency stability. An attempt has been made in this paper to identify the challenges in trading in rupee derivatives which present good opportunities for India to develop this industry. For that, the paper first discusses the global scenario of currency derivatives which is followed by the rupee derivatives trading in India and rupee derivatives in volumes in other global markets. To draw some lessons from the Chinese experience it then covers in brief the Chinese currency trading experience. This is followed by details covering challenges and opportunities for developing rupee trading in International Financial Services Centre (IFSC) in India, as IFSC is like an offshore centre from regulation and tax perspective but is on Indian shore