Non-Deliverable Derivative

Non-Deliverable Derivative Latest News

Recently, the Reserve Bank of India’s (RBI) gave a directive to bar banks from non-deliverable derivative (NDD) contracts in the rupee.

About Non-Deliverable Derivative

• An NDD is a derivative contract where two parties agree on a future exchange rate for the rupee, but settle the difference in cash, usually in US dollars.
• Reason for formation: As India has capital controls, offshore investors can’t freely trade in the rupee in physical form. This led to the creation of the NDD markets in the rupee.
• Participating Parities: The NDD market is widely used by foreign investors, hedge funds and global banks who cannot freely access and play in the Indian rupee market.
• These trades take place offshore, outside the control of the RBI.
• This often acts as a price discovery mechanism for the rupee, even influencing expectations before Indian markets open.
• Issues with NDD

• • Distort Price Discovery: These instruments have long been criticised for distorting price discovery.
  • Used For Speculation: Some participants would cancel and re-enter contracts to take advantage of favourable movements, effectively turning hedging tools into speculative instruments.

Source: IE

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