Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

BIS Confirms Huge Offshore Rupee Market

In my post early this month, I very tentatively argued that data from the BIS and the RBI could be put together to suggest that half the rupee-dollar market was outside India. Most people whom I talked to said that this was unlikely and that there was probably some error either in the data or in my analysis.

But now the BIS has published a paper on offshore foreign exchange markets which gives clearer data. According to Table 7 of this paper, 52% ($10.8 billion) of the total rupee forward and forex swap market ($20.8 billion) is offshore and only 48% ($10.0 billion) is onshore. We still need to wait for November for more detailed data on other segments of the rupee market, but $10.8 billion a day is much larger than most estimates that I have seen or heard of the offshore non deliverable forward market.

The same table provides data about 2007 as well – only 30% ($3.6 billion) of the rupee forward and forex swap market was offshore. In just three years, the offshore market has tripled in size! A footnote in the table cautions us that the mandatory reporting of trades in the rupee (and several other emerging market currencies) following its reclassification of these currencies as major currencies would have increased the reported size of the offshore markets.

According to the BIS Paper, the offshore markets are even bigger for the Chinese renminbi (63% is offshore but much of that is in Hong Kong) and the Brazilian real (82% is offshore). The paper argues that offshore non deliverable markets in the Brazilian real, Chinese renminbi and Indian rupee are now so large that “adding an offshore deliverable money and bond market may not represent a large change.”

Suddenly, we are waking up to a much more internationalized currency than any of us were aware of. I have long argued that Indian capital controls are more “sand in the wheels” than effective barriers to capital flows. The data points in the same direction – policy makers must recognize that India has a de facto open capital account.

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