What the demonetisation episode tells us about offshore currency markets
The NDF market seems to have led local markets in price-discovery during 8 and 9 November
Over the past few years, there has been a growing realization that a significant chunk of the dollar-rupee trade may be leaving Indian shores for offshore markets, but the issue has not yet received the policy attention it deserves. Two recent high-profile events: the announcement of demonetisation on 8 November, and the election of Donald Trump on 9 November, can help us understand how important the offshore markets have become today. Our analysis of high frequency trade data during these two days suggests that price-discovery during certain times of the day is taking place offshore, with spot prices following the trends in the offshore markets. The growing role of a relatively unregulated offshore markets in determining the value of the rupee is a cause for worry, as it makes our currency markets more vulnerable to international shocks, and undermines the effectiveness of actions taken by the Reserve Bank of India (RBI) to tackle such shocks.