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Mumbai: Currency derivative trading in the GIFT City has gained traction with the monthly volume touching as much as $27 billion in the non-deliverable forwards (NDF) market, as both local and foreign banks with a presence there are hedging positions.

While the monthly volume at the GIFT City International Financial Services Centre (IFSC) may just be equal to the daily volume in the cash market, it has provided a cushion for the central bank to smoothen currency volatility with local banks doing their bit to counter international investor actions.

Entities based in the IFSC are permitted to deal in financial products and services across borders. With effect from June 1, 2020, the Reserve Bank of India permitted IFSC-based banking units to offer non-deliverable derivative contracts involving the rupee. Before this, only foreigners with access to the NDF market could do so in the offshore market.

Allowing domestic banks to trade in NDF has helped narrow the arbitrage between the domestic rupee market and the non-deliverable forwards market.

“Offshore liquidity has shifted to onshore via GIFT City NDF market,” said Bhaskar Panda, executive vice president at HDFC Bank. “This has helped the central bank to manage the exchange rate risk better. With the presence of local and India-based foreign banks (at the GIFT City), business activities have gone up significantly, adding to voluminous trades in the NDF market,” he said.

In April this year, the monthly derivatives booked by banks in GIFT-IFSC reached $27 billion versus less than $10 billion a year earlier, market sources told ET.

Derivatives volumes by IFSC-based banking units, including NDF, have seen substantial growth since the banks in the special economic zone were permitted to undertake these transactions. The total derivatives transactions are undertaken by these units until April 2022 were worth more than $249 billion.

“We are seeing great momentum in banking transactions at GIFT IFSC,” said Dipesh Shah, executive director-development at the International Financial Services Centres Authority. “With the regulatory framework being aligned to global best practices, the IFSC banking units are seeing overall growth in their international financial services business at GIFT IFSC.”

Banks setting up shops at the GIFT City are also engaging in derivatives activities including hedging their clients’ positions and intra-day speculations. The expanding derivatives business there is likely to provide a leeway to regulators trying to curb wild swings in the local currency.

Local lenders including HDFC Bank, ICICI Bank and

are among those engaging in financial transactions at the GIFT City. These banks could not be contacted immediately for comment.

The central bank has at times been seen intervening in the currency market via the NDF market. But the narrowing of arbitrage between the domestic rupee market and the non-deliverable offshore market has now eased the need for an aggressive central bank intervention in the currency market.

The differential that used to be as high as 40 paise has shrunk to about 5 paise, as domestic banks could now trade in NDF.

Foreign banks including HSBC, Standard Chartered, Barclays and Deutsche have set up their shops in GIFT-IFSC. Citi, JP Morgan and MUFG are also expected to commence operations soon at GIFT City, a special economic zone.


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