At least seven lenders, including Axis Bank, HDFC Bank and , are harnessing the GIFT City facilities to mark a robust Indian presence in the non-deliverable forward (NDF) currency derivatives market, potentially paving the way for eventual currency convertibility that’s considered a draw-card for overseas investments. Average daily volumes in over-the-counter trades at Gujarat GIFT City surged to an estimated $1.5-2 billion from $100-200 million about a year ago, four bankers told ET.

Among the other major participants in the NDF trade are State

, , Kotak Mahindra and Standard Chartered, executives said. “Daily average volumes have surged for offshore OTC NDF trades during the onshore time,” said Bhaskar Panda, executive vice president at HDFC Bank. “This has helped bridge gaps between offshore and onshore prices bringing in relative stability in the exchange rate. This in turn will help attract foreign investors, who always prefer full currency market convertibility.” IndusInd, Kotak and SBI didn’t comment.

The differential between one-month onshore and offshore forwards trade is now less than a paise, which would have been about four-five paise in normal circumstances. A wider differential encourages speculators to tap arbitrage opportunities short-selling rupees or dollars, a potential source for heightened volatility. The one-month Rupee Options Volatility index is now at 4.51 percent versus 7.63 percent nearly a year ago, show data from Financial Benchmarks India (FIBIL). “Axis Bank IBU Branch has been playing a significant role in the NDF markets at GIFT City,” said Lalit Jadhav, CEO – Axis Bank IBU Branch, GIFT City.

“We have a full-fledged Treasury Desk with robust risk controls and look at trading opportunities in this segment which can potentially help reduce volatility and drive price convergence between offshore and on-shore markets.” Before local banks were allowed to tap the NDF market at GIFT City, the Reserve Bank of India was unable to control NDF moves on the rupee-dollar. Now, the central bank even directs private banks along with traditional public sector lenders to buy or sell units, which is known as NDF market intervention.

“NDF business would be one of the core pillars of our business strategy at GIFT City that provides an excellent platform to meet the global banking needs,” said Anupam Verma, head – international banking unit, IFSC GIFT City, ICICI Bank. RBI had permitted Indian banks, which hold a licence to operate in the International Financial Services Centre in GIFT City – Ahmedabad, to participate in the NDF market from June 1 in 2020. “The liquidity has significantly improved in the NDF market at GIFT City with large local banks transacting,” said Anindya Banerjee, currency analyst at Kotak Securities.

“We are gradually moving towards full capital account convertibility making our exchange rate easily available.” RBI deputy governor T Rabi Shankar Thursday called for a preparedness to meet challenges related to full capital account convertibility as foreign investors get full access to India’s debt market under a dedicated route meant for global bond index inclusion.

“A key aspect of currency convertibility is integration of financial markets,” Shankar said at the fifth Foreign Exchange Dealers’ Association of India (FEDAI) annual day. “An effort has already commenced in the interest rate derivative segment.” “NDF-onshore spreads have substantially narrowed after allowing Indian banks into the NDF space,” he said.