More than half of rupee FX transactions are offshore
Some months ago, when the rupee was in free fall, the government did its best to reduce trading in the forex market, but that hardly helped. To the extent forex markets in India were squeezed with all manner of restrictions, the non-deliverable forwards (NDF) market in financial centres like Singapore, Hong Kong, London and New York simply picked up. Indeed, whenever there was a difference between what the NDF and local markets were quoting, the local market adjusted the next day. Turns out, according to BIS data that comes out once in three years, around 53% of all forex trades in the rupee take place in the overseas NDF markets—the BIS data is for April, the number probably grew over the past few months. With the RBI swaps bringing in $34 billion and the oil demand smartly taken out of the market for some months—with the possibility of being able to do it at will—not surprisingly the NDF market has also settled.
The moral of the story is that, as India has got more internationalised, it is foreign influences that will determine how the broad economy moves and there is little the government can do about that. If more than half the currency markets are located overseas, more than a fifth of all equity in the BSE 200 is owned by foreigners—in terms of the non-promoter holdings, that’s around two-thirds, which explains why FIIs are such a powerful mover of Indian stock markets. Add up exports and imports, and 55% of GDP is dependent upon what happens in overseas markets—add services to it, and the number becomes even higher. So no matter how much the government may decry what foreign fund houses or their economists say, they do call the shots. Indeed, despite the significant dollar inflows into G-Secs that being part a global bond index promises, the reason why the government is wary of agreeing to it—India needs to remove all FII limits on purchases of government debt—is that, were FIIs to exit after buying up a large part of government debt, this would send bond yields soaring. Higher inflows of dollars are welcome, but they come with a strong dose of accountability attached. Given how close to 70% of all emerging market currencies are traded in overseas markets, it’s not going to be possible to control the pace of the internationalisation either.