Foreign banks are big players in non-deliverable forwards market

Economic Affairs Secretary Arvind Mayaram, on Saturday, discussed the continuing rupee fall and the resultant macroeconomic impact with the treasury heads of leading foreign banks.

The closed-door meeting held at the LIC headquarters here was attended by treasury heads of foreign banks such as Standard Chartered, HSBC, among others.

Though Dr. Mayaram spoke to the waiting reporters, he refused to talk about the outcome of the meeting. Similarly, the participants also refused to speak.

According to sources, he discussed the crucial NDF (non-deliverable forwards) market, which largely influences the movement of the rupee in the domestic market.

“What is significant is that the RBI does not have any control on this market. In the RBI’s annual report released recently, it has admitted that there is deeper correlation between the rupee movement in the onshore and offshore market.

“During the period of rupee depreciation, shocks originating in the NDF market may carry more information, which gets reflected in the onshore segments of the market through mean and volatility spillovers,” the RBI said in its annual report quoting its internal research, released on August 22.

After sinking to a record low of 68.85 against the dollar on August 28, it stabilised on Friday to close at 65.70.

The meeting assumes importance as foreign banks are big players in the NDF market and their influence on the market is high as volumes are too large in comparison to domestic.

NDF deals are forward transactions settled in dollars because the rupee, being not fully convertible, cannot be delivered outside the country.

On the June quarter GDP numbers, he said the reading was expected, but said there were chances of revival in the second half.

The economic growth slipped to the lowest since the 2008 crisis to 4.4 per cent in the first quarter against 5.4 per cent in the same quarter last fiscal.

“One must remember that both the Prime Minister (Manmohan Singh) and the Finance Minister (P. Chidambaram) said in the first quarter there would be a flattish growth because the spillover of last years’s slowdown, especially a very sharp fiscal correction that took place.

“So the number was expected,” he said.

Dr. Mayaram said revival in growth in the second half of this fiscal will be driven by higher government expenditure and on account of the project approvals given by the Cabinet Committee on Investments (CCI).

“The kind of expenditure that have started happening, the approvals that are given by the CCI, the investments coming in on those will only be reflected not in the second quarter but in the third and the fourth quarters,” he said.

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