Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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jrvarma@iimahd.ernet.in

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Fri, 03 Sep 2010

Is half the rupee-dollar market outside India?


I do not know whether I am reading the data wrong, but the preliminary results of the BIS Triennial Survey on foreign exchange turnover (April 2010) appear to suggest that nearly half the rupee-dollar market is outside India.

For the first time, the 2010 BIS survey includes the rupee as a “main currency” and provides data about the USD/INR turnover. According to Table 4, the average daily turnover in USD/INR was $36 billion. Table 5 tells us that the average daily foreign exchange turnover in India was only $27.4 billion. That might suggest that India accounts for 75% of the USD/INR market.

However, not all the Indian market is USD/INR. According to the RBI data (Table 47 of the RBI bulletin of June 2010) in April 2010, INR versus all foreign currencies was only 71% of the market in India; almost 30% was trading of various foreign currencies against each other. In this computation, I have taken both sides of the merchant trades and only one side of the inter-bank trades as the BIS data is on net basis. Of course, BIS also does cross border netting which might change the numbers a bit, but I would think the percentages might not be impacted too much.

If we make the reasonable assumption that the entire INR versus foreign currency market in India is actually INR versus USD and take 71% of $27.4 billion as the USD/INR market in India, we get $19.5 billion which is only 54% of the $36 billion global USD/INR market. If these calculations are approximately correct, India is only a little more than half of the total global rupee-dollar market.

One other relevant data point is that according to the BIS Table 5, India’s share of the global foreign exchange market has dropped from 0.9% in 2007 to 0.5% in 2010.

Unfortunately, while the BIS links to various central banks that publish their national results at the same time as the BIS, the RBI is not among them. So we do not have more data to verify these computations.

Posted at 15:18 on Fri, 03 Sep 2010     8 comments     permanent link

Comments...

Finance_Guy wrote on Sun, 05 Sep 2010 16:50

Re: Is half the rupee-dollar market outside India?

Sir, What is the significance of this fact. Will this lead to more volatility or should we be not concerned and take it as a positive sign. '

Kushankur, Doctoral Student, IRMA wrote on Wed, 08 Sep 2010 01:33

Re: Is half the rupee-dollar market outside India?

Sir, I think earlier post raised a valid issue, that is, volatility. I believe that few indicators are to be taken into consideration, that is, bank rate, call rate (weighted), foreign exchange rate differential, interest rate differential in order to arrive at the chemistry behind INR-USD market turnover, either in OTC or exchange traded market. Simply, demand for money and supply of it largely determine the liquidity and thus, trade volume.

Prof. Jayanth R. Varma wrote on Wed, 08 Sep 2010 10:51

Re: Is half the rupee-dollar market outside India?

I think the first issue is whether the BIS and RBI data are correct or whether there is an error in one or both of them. We will probably have a clear picture about this in November when BIS publishes detailed tables showing location wise break up of the $36 billion USDINR turnover that they talk about and hopefully RBI publishes its data as well.

If one of these two people have made a mistake, that is the end of the story - it would just be a reminder that allegedly authentic data can be wrong. It would be similar to the fiasco on the Indian quarterly GDP numbers where the CSO applied a wrong inflation adjustment to produce absurd numbers.

But if the BIS is right and half of the INRUSD is actually outside India, then the offshore market is much bigger than anybody thinks. In an opaque market anything is possible.

Bid ask spreads are not conclusive. The spreads in the currency futures in India are only half that in the OTC market which has probably three times the volume. It is possible that there are some very large trades ($1b+) taking place offshore that few people are seeing and therefore are aware of. It is possible that the impact cost of trades of this size may be comparable in India and offshore though bid-ask spreads for $1m lots are much lower in India.

The ultimate hedging demand is also not conclusive. Just as the inter-bank volume in the OTC market in India is several times the merchant volume, the total volume in the offshore market could be several multiples of the end-user volumes.

We just have to wait for the November data releases to know the truth.

As far as policy implications are concerned, it is too early to talk about them without having the facts. But if the data is correct, then I think it would be troubling that another of our financial markets is being exported away from India. Even more troubling would be the complete absence of transparency about a key financial market.

Incidentally, Mint has carried a story on this issue http://www.livemint.com/2010/09/06221123/How-much-of-the-dollarrupee-t.html

Osvin wrote on Wed, 09 Mar 2011 11:09

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Aurodeep wrote on Tue, 02 Aug 2011 22:54

Re: Is half the rupee-dollar market outside India?

Dear Sir,

Your estimate may be slightly flawed...do correct me if I am wrong. According to you, the off-shore market for India is $ 19.5 bn. Now in the same BIS data tables, there is a break-up of turnover in terms of spot, outright forward, swaps (and others). The definition of outright forwards according to BIS includes Non-deliverable forwards. According to BIS in 2010, the daily turnover in the outright forward market for INR is around $ 13 bn. This will include both on-shore and off-shore forward markets. And from what I understand; the only off-shore market for India would be the NDF market, which according to this data has to be <= $ 13bn...much less than your estimate of $ 19.5 bn.

Actually I would be highly obliged if you can you help me where I can find data/estimate on the turnover of NDF market in India over the years. Can it be inferred from BIS data?

Thanks, and looking forward to your feedback!

Regards,

Aurodeep



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