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India’s Economic Affairs Secretary Arvind Mayaram discussed the continuing rupee fall and the resultant macroeconomic impact with the treasury heads of leading foreign banks.
According to sources, Mayaram discussed the crucial NDF (non-deliverable forwards) market, which largely influences the movement of the rupee in the domestic market.
Banks and hedge funds also use NDFs to take speculative positions.
The closed-door meeting was attended by treasury heads of foreign banks such as Standard Chartered, HSBC, among others.
“What is significant is that the Reserve Bank of India (RBI) does not have any control on this market. In the RBI’s annual report released recently, it has admitted that there is deeper correlation between the rupee movement in the onshore and offshore market.
“During the period of rupee depreciation, shocks originating in the NDF market may carry more information, which gets reflected in the onshore segments of the market through mean and volatility spillovers,” the RBI said in its annual report quoting its internal research, released on August 22.
The meeting assumes importance as foreign banks are big players in the NDF market and their influence on the market is high as volumes are too large in comparison to domestic.
NDF deals are forward transactions settled in dollars because the rupee, being not fully convertible, cannot be delivered outside the country.
Indian policymakers have raised concerns about offshore trading for aggravating falls in the rupee with speculative bets in currency based contracts traded in financial centres.
According to a recent central bank survey, the NDF market accounted for about 50% of dollar-rupee market.
Government data released on Friday shows India’s economy grew at 4.4 per cent in the April-June 2013 quarter, its slowest rate since the first three months of 2009.
Mayaram said the figure was expected, but said revival in growth in the second half will be driven by higher government expenditure and on account of the project approvals given by the Cabinet Committee on Investments (CCI).
“The kind of expenditure that have started happening, the approvals that are given by the CCI, the investments coming in on those will only be reflected not in the second quarter but in the third and the fourth quarters,” he said.
“One must remember that both the Prime Minister (Manmohan Singh) and the Finance Minister (P. Chidambaram) said in the first quarter there would be a flattish growth because the spillover of last years’s slowdown, especially a very sharp fiscal correction that took place,” he added.
The rupee stabilised on Friday to close at 65.70.