RBI Allows Banking Units at IFSC to Settle Non-Deliverable Derivative Contracts: Tuesday, the Reserve Bank allowed international banking units (IBUs) in Gujarat’s GIFT City to resolve non-deliverable foreign exchange derivative contracts (NDDCs) in Indian rupee. Derivatives are currently resolved in foreign currency with cash.
RBI Allows Banking Units at IFSC to Settle Non-Deliverable Derivative Contracts
According to the notification, Authorised Dealer (AD) Category-I institutions operating IBUs may offer NDDCs involving the Indian rupee for hedging purposes to resident non-retail users. These transactions must be resolved in cash in Indian rupees.
”The flexibility of cash settlement of NDDCs transactions between two AD Category-I banks and between an AD Category-I bank and a person residing outside India in INR or any foreign currency,” it stated.
This will aid in the development of the onshore rupee NDDC market and provide residents with the flexibility to design their hedging programmes in an efficient manner, it was stated.
The RBI’s decision to permit banks to offer rupee NDDCs to Indian residents will eliminate arbitrage between domestic and foreign markets.
With effect from June 1, 2020, banks in India that operate International Financial Services Centre (IFSC) Banking Units (IBUs) were permitted to transact in rupee NDDCs with non-residents and with each other.
In order to develop the onshore rupee NDDC and provide residents with the flexibility to efficiently design their hedging programmes, it has been decided to allow banks with IBUs to offer rupee NDDCs to resident users on the onshore market, the RBI said in an April statement on Developmental and Regulatory Policies.
These institutions will have the option of settling NDDC transactions with non-residents and among themselves in foreign currency or Indian rupees, while transactions with residents must be settled in rupees.