The non-deliverable forwards (NDF) markets are exerting more pressure on the onshore currency market, especially when rupee is under stress, the Reserve Bank of India said in its annual report, quoting an internal research.

“During the period of (rupee) depreciation, shocks originating in the NDF market may carry more information, which get reflected in the onshore segments of the market through mean and volatility spill-overs,” says the study.

The rupee has plunged nearly 21 per cent so far this fiscal.

The NDF is a foreign exchange derivative instrument traded over-the-counter, and is operated in currencies that are not freely convertible such as the rupee. The market enables hedging of exchange rate risks, irrespective of any restrictions arising in the currency of origin.

The analysis says there is a long-term relationship between the spot and the NDF markets for the rupee.

“During the period of the (rupee) appreciation, the NDF market and the rupee spot market exhibit a bi-directional relationship,” says the study. However, at times of rupee fall, relationship turns unidirectional from the NDF to onshore market, the study notes.

The NDF, or the offshore, market remains outside the regulatory purview of the RBI.

More In: Industry | Business