The regulator’s decision to allow banks to offer rupee non-deliverable foreign exchange derivatives contracts (NDDC) to Indian residents will help eliminate arbitrage between domestic and foreign markets, experts said on Thursday.

Indian banks operating the International Financial Services Centre (IFSC) Banking Units (IBU) can offer rupee NDDC in the onshore market, the Reserve Bank of India said in a statement on Thursday.

A statement on the development and regulatory policy issued alongside the monetary policy said derivatives contracts would be settled in rupees, and the central bank would issue instructions on this separately.

RBI said the move is aimed at developing onshore Indian rupee (INR) NDDCs and providing residents with the flexibility to design hedging schemes efficiently.

Indian banks with units operating in the International Financial Services Centre were allowed to transact in NDDC rupees with non-residents and with each other with effect from June 1, 2020.

These banks will have the flexibility to settle NDDC transactions with non-residents and each other in foreign currency or Indian rupees. In contrast, transactions with residents will be mandatory in Indian rupees.