Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Offshore rupee and renminbi markets

India and China appear to be responding in very different ways to the issue of their currencies trading offshore (the non deliverable forward or NDF market). The Reserve Bank of India says in its Financial Stability Report (page 29-30):

Prevalence of a large offshore market raises systemic concerns with regard to both monetary policy and financial stability as the offshore and onshore markets do not operate in silos.

In the Indian context, the major participants in the NDF markets are understood to be hedge funds and multinational firms (both domestic and foreign). Such participants tend to be guided more by international developments than domestic factors. Adding to the risks arising from NDF markets is the fact that information and flows going through in such markets are not available in a reliable and transparent manner. This opacity prevents the central bank from having an adequate early warning mechanism to tackle balance sheet adjustments and disorderly winding down of large one-way bets driven by market players.

China on the other hand has the advantage of an offshore centre (Hong Kong) which is under its own sovereignty but operates under a different economic regime. Mainland China and Hong Kong put together account for about half the global trading in the renminbi. This is roughly the same as the share of the global trading in the rupee that takes place in India (Table D.6 of the BIS data). China’s response to the growing offshore market is to make Hong Kong a more attractive centre for trading the renminbi. In a speech last month, the head of the Hong Kong Monetary Authority (HKMA) said:

With the strong support from the Central Government and the relevant Mainland authorities, the development of RMB business in Hong Kong has been encouraging this year.

I believe that next year will be a crucial year for the development of offshore RMB business in Hong Kong. … Finally, to further promote the development of the RMB offshore business in Hong Kong, the HKMA is making preparations for overseas roadshows with the financial industry, focusing on locations which have growing trade and investment flows with the Mainland. We believe that with our joint efforts, Hong Kong will be able to play its role as an RMB offshore market to the fullest, thereby promoting and supporting the nation’s increasing cross-border trade and investment activities while enhancing and consolidating the status of Hong Kong as an international financial centre.

India still seems far away from this “if you can’t beat them, join them” approach. Actually, India already has a liquid non deliverable rupee market within India – it is called currency futures. Why can’t India use this market as strategically as China is using Hong Kong?


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