Expressing concerns over the large volume of rupee market being played out in overseas market leading to high volatility, Finance Minister P Chidambaram today asked market players to suggest ways to bring trading back to the country and stressed on the need for more financial reforms to boost the local market.
"One important concern is the loss of onshore market of the rupee... the volume of trading of rupee in the NDF (non-deliverable forwards) market is said to be a multiple of the volumes in the official domestic exchanges," he said at an event celebrating the 20th anniversary of the National Stock Exchange here.
Admitting that the government does not have much role to correct this lacuna, Chidambaram asked market participants to come up with solutions.
"At the government, we don't have a solution to this (bring back the market volume). The solution has to come from the market participants," Chidambaram said at a panel discussion after his keynote address.
"The goal is to bring those markets back to the country, not to the exclusion of the world but at least the market here can compete with the market outside," he added.
NDF is an offshore forex derivative market, traded over-the-counter and operated in currencies that are freely convertible unlike the rupee. This market enables hedging of exchange rate risks, irrespective of any restrictions arising in the currency of origin.
The NDF market is not controlled by any authorities here, and is dominated by foreign players as RBI does not allow domestic banks to participate in this market. Also, the sheer volume in this market leads to frequent volatility in the domestic market.
The Reserve Bank has also been keenly watching the NDF market and for the first time, it has openly come out a statement in its annual report released in August.
Quoting an internal report, RBI had said the offshore market is leading to rupee movement and is exerting more pressure on onshore currency market, especially when rupee is under stress.