Non-Deliverable Forward (NDF) Markets

Subject – Economy

Context – The offshore NDF market for the rupee remains a challenge, despite RBI’s attempts to curb its influence.

Concept –

NDFs are foreign exchange derivative instruments on non-convertible or restricted currencies traded over the counter (OTC) mainly at offshore centres outside the direct jurisdiction of the respective national authorities.
NDF is a foreign exchange derivatives contract whereby two parties agree to exchange cash at a given spot rate on a future date. The contract is settled in a widely traded currency, such as the US dollar, rather than the original currency
The Task Force on Offshore Rupee Markets, set up by the RBI (chaired by UshaThorat, former Deputy Governor, RBI) had proposed that Indian banks should not be permitted to deal in the offshore rupee derivative market — or the NDF market — for the present as the downside of permitting them to deal in this market outweighs the advantages.
However, The Reserve Bank of India (RBI) has decided to permit banks in India, which operate International Financial Services Centre Banking Units (IBUs), to participate in the non-deliverable forward (NDF) market with effect from June 1, 2020.
[‘Onshore’ currencies simply mean buying the currencies locally, whereas ‘offshore’ currencies mean buying the currencies outside the national boundaries].