The recent episode of depreciation has clearly been led by off-shore non-deliverable forwards (and options) markets where entities like hedge funds and proprietory desks of multinational banks place their bets. The non-deliverable forwards market has taken the lead in setting the exchange rate and the domestic market has played catch-up.

The central bank's intervention in the local market has consequently not worked. Thus, the RBI has to find a way of directly intervening in this market. I am not sure if this is possible, but in the very near term there could be an option of intervening with the help of other central banks that are known to have intervened in this market - like the Korean or Indonesian central banks. The RBI typically intervenes in the local markets through state-run banks and, thus, there is a strong case, going forward, to allow at least these banks (if not all Indian banks) to operate in the non-deliverable forwards market. Read More